CHAPTER 10

MONOPOLISTIC
COMPETITION
COMPILER : DR. PRECILA R. BAUTISTA
Learning objectives:
At the end of the chapter, will learn
about:
- The characteristics of monopolistic
competition,
- Why do they earn a normal profit in the
long run,
- The benefits of product variety.
Monopolistically competitive market exhibits
the following characteristics:
1.Relatively large number of sellers,
2.Differentiated products,
3.Easy entry and exit

- Among these three characteristics, the first

and last, exhibit the competitive aspect of this
type of market and the second exhibits the
monopolistic aspect.
Monopolistic competition
- The existence of a fairly large number of sellers, producing
differentiated products with an easy entry and exit in the market.

- Can be described by having a fairly large number of firms, but not as

hundreds or thousands like in a pure competition.

- It only have a small share in the total market, giving it a limited

control over the market price.

- Because of the large number of firms, the restriction of output and

price-setting is not likely to be possible, there will be no
interdependence among them. Each firm may set his own price
without thinking of the rival’s reaction.
Differentiated products
- A purely competitive marker produces standardized products, in
contrast, a monopolistically competitive one offers differentiated
products. Firms make variations of a specific product.
- The variations:

1. Product attributes differentiation may be in the product’s physical

attributes or quality. The materials used, the design, and the
process of producing those products varies. Ball pens for ex- differ
in size, the ball point and other features. Our all-time favorite
French fries may feature different cuts.

2. Service – the courteousness of the clerks, the way they help their
customer’s needs is a differentiation from other stores. It also
includes the credits and the warranties that a store is offering.
3. Location – a store’s location and accessibility is an
important aspect in competition. We are all familiar with 7-
eleven and mini stop, these convenience stores are strongly
competing in the market even with big stores.

4. Brand names and packaging – the trademarks, names

and packaging creates a differentiation among products.
Candy wrappers attract kids from purchasing that good for
example.
- Some control over price even if there is a relatively large
number of firms, these firms have some control over their
prices due to differentiation.
Easy entry and exit
- Industry with oligopoly and monopoly, it is
relatively easier. The reason behind this is that
firms in this industry are relatively small, which
only requires low capital.

- Exit is also relatively easy since nothing

prevents an unprofitable firm from shutting
down.
Advertising
- If consumers would not be aware of the product
differences, the efforts in making those would be
wasted.

- Advertisements of these products are made

heavily, which sets the goal of achieving a non-
price competition.
- Non-price competition – making the price not a
heavy factor in consumer purchases.
Price and output in monopolistic competition
- What is the process of making price and output
decision of a monopolistically competitive market?
Let us discover it by making an assumption that
firms are producing a specific differentiated
product and paying a particular amount of
advertising.
The firm’s demand curve
- The demand curve faced by monopolistically competitive firms is
highly elastic. It differentiates a monopolistic competition from
monopoly and pure competition. It is more elastic as compared with
a monopolist, since it has several competitors. But a
monopolistically competitive firm’s demand curve is not perfectly
elastic since it has fewer number of competitors and products
produced are differentiated making it not a perfect substitute.

- The demand curve for this firm highly depends on the number of
rivals in the market and the degree of product differentiation. If poor
differentiation exists, and there is a large number of competitors,
there will be a greater price elasticity which may soon lead the firm
to become a purely competitive one.
Short run: Profit or Loss
- Just like the other firms that had been
discussed, a monopolistically competitive
firm maximizes its profit and minimizes its
loss in the short run by producing the
number of outputs where the marginal
revenue equals marginal costs. (MR=MC).
Long run: Just a Normal Profit
- In the long run, unprofitable industries will
be abandoned by firms and a profitable
monopolistically competitive industry will
be penetrated by several firms. So, a
monopolistically competitive firm will only
break even in the long run, or what we
consider the normal profit.
Profit: Firms will enter
- In the short run, economic profit attracts other
firms from entering in the industry since entry
is relatively easy. As firms enter, the demand
curve shifts to the left. The reason behind this
is the smaller share of each firm in the total
demand in the market, where there is already
a large number of close substitutes which will
soon result in a decline in economic profit.
Losses: Firms will leave
- If there are several losses in the short run, firms will exit in
the long run. Because of this, there will be a fewer number
of substitutes and smaller number of competitors, the
demand curve will shift to the right, which will soon make
their losses disappear and give way to normal profit.

- The firms earns a normal profit only in the long run. This
may not always occur. The world of small businesses in
the real world differs from that of the theoretical model.
Product Variety
- A firm need not watch every competitor’s action of imitating
their products because firms produce items which are
distinguishable from those of the other producers. Firms
can stay ahead of the other firms by continuing the efforts
for product differentiation and increasing the amount
allocated for advertising, simply, improving their products
and advertisements further.

- Even if the improvement will increase the firm’s costs, it will

also increase the product’s demand. If the demand
increases in an amount which can compensate the costs,
then the firm is in good profit position.
Benefits of Product Variety
- Improvements in the product and variety will sustain a firm’s
economic profit. This will result in a benefit for the society
and can offset the cot of inefficiency of monopolistic
competition. Consumers have a wide variety of preferences.
Like the pizza that we all love, there is a thin crust pizza, for
those who do not like thick crust. This gives the consumer a
wide range of choices, therefore it is their benefit. If a
certain firm further improves its products, it gives the
competitors the reason for improving their products too, in
order to meet their rival’s quality. The society, then, benefits
from better quality of products.
 THANK YOU!!
GOD BLESS US ☺
CTTO--