MONOPOLISTIC COMPETITION

            A monopolistically competitive market structure is often defined by tough competition

among hundreds of companies offering similar products and services in the market. Any firm can
easily enter the market and even an established firm could go bust and be out of the market
game. The best example can be used to describe this type of market structure would be the
retail industry in Malaysia. Some of the retail stores in Malaysia includes top international brands
such as Zara, TopShop, Gap, Elle, Island Shop, Charles & Keith and even local brands such as
Nichii and Kitschen. Many of these retailers offer similar products, only sometimes varying in
quality and pricing. If a certain retailer decides to increase the price of its products, consumers
will start looking for a cheaper substitute. Each firm’s price can only deviate from the average
price of other firms by only a relatively small amount. This implication is described as a small
market share. In the Malaysian retail industry, firms constantly find creative ways to boost their
sales and maintain market share. For an example, Topshop, a retailer that makes massive sales
yearly, has a day exclusively for their members where goodies will be handed out to the first 300
customers and discounts are given, even on new arrivals. This attracts even more customers to
be members of the retail company. Even though this exclusive day is only being done once a
year, and only for a day, it attracts many consumers who will spend more at their stores,
compared to other stores (Economics Everyday, October 2012).

The graph below indicates a typical firm in a monopolistically competitive industry in the long
run equilibrium:

Profits are zero and owners of firms are earning a return equal to their best next
opportunity. A monopolistically competitive market has high elasticity of demand in the long run
and excess profits are only short term and not long term. The profit maximization condition for
this type of market structure is MR=MC. There is no efficiency in monopolistically competitive
markets and have low market power.