AHLCON INTERNATIONAL

SCHOOL ECONOMICS RESEARCH

PROJECT

Monopolistic Competition in Real World

In 2022, India with the fastest growing economy, demands are at their peak. With such
skyrocketing statistics it’s a significant issue to supply the goods and services with an
adequate amount to balance out the need. To offset, we enter the Monopolistic Market. Zara,
H&M, and Sarojani Nagar are in the same market, offering similar products but different
quality and diverse status symbols. A pocket-friendly consumer will find its ideal product in a
local market, though it will not be the perfect substitute for the original one. The constant
competition in the market has led the suppliers to find a substitute for each product according
to the consumers, this has cleared out the emergence of Monopolistic Competition in the real
world.

Monopolistic competition is a type of imperfect competition such that there are many

producers competing against each other, but selling products that are differentiated from one
another (e.g. by branding or quality) and hence are not perfect substitutes.  None of the
companies enjoy a monopoly, and each company operates independently without regard to
the actions of other companies.

Characteristics of Monopolistic Competition

Monopolistic competition has several defining qualities that differentiate it from other market
structures. These five characteristics include:
1. Slightly different products and services
A defining quality of monopolistic competition is that the products that companies within this
structure sell are similar yet slightly different. These differences may be physical or artificial,
depending on the needs of each company. For instance, there might be four different pizzerias
within a particular city. The pizza they sell may be similar in that they all contain dough,
sauce, cheese, toppings and share nearly identical cooking and preparation processes. For a
customer to choose one pizzeria to visit, it's important for each company to develop ways to
differentiate their product, such as unique marketing, deals or location.
2. Free entry and exit from the market
Free entry from an economic market means that a business can begin selling a good or
service and experience few barriers to entry, while free exit means that a company can leave
a market relatively freely if it experiences monetary losses. Although there are costs
associated with starting any business, the flexibility of monopolistic competition allows
companies to enter and exit somewhat easily. This is essential because as soon as one
company generates profits, new businesses often try to enter the market and experience those
same benefits, which requires companies to plan for competition affecting their own profits.
3. Many companies
There are also many businesses within a monopolistic competition market. A high number of
companies results in any individual company having little influence over the decisions
competitors make. For example, if a company increases its prices too much, consumers can
simply choose another brand. Alternatively, if it lowers its costs too much, a consumer may
believe its products to be inferior and stop buying them.
4. Imperfect consumer knowledge
Customers often consider information, such as pricing and quality, to make effective
purchasing decisions. In a highly competitive market with dozens of nearly identical choices,
it can be difficult for consumers to gauge all their options properly. Consumers rarely have
perfect knowledge about each product they buy, and companies use this to create a perception
of difference through advertising and marketing campaigns, even though there may not be
any actual difference.
5. Profits
In the short term, companies may earn extraordinary profits within a monopolistic
competition market. This is often due to the fact that consumers want to try a new brand or
want to experience new deals. As more companies enter the market, many firms see profits
shrink to a more normal level. To alter this, companies can innovate, differentiate their
products, or leave the market entirely. The low barrier to enter and exit means that many
companies earn short-term profits but quickly experience competition that may lower their
margins.

Some Examples of Monopolistic Competition

Monopolistic competition is present in many familiar industries, including restaurants, hair

salons, clothing, and consumer electronics. A good example would be Burger King and
McDonald's. Both are fast food chains that target a similar market and offer similar products
and services. These two companies are actively competing with one another, as well as
countless other restaurants, and seek to differentiate themselves through brand recognition,
price, and by offering slightly different food and drink packages.

Another example running shoe brands- The market for running shoes is considered one with
a high level of competition. Adidas, Nike, New Balance, and Reebok are just a few brands
from which people prefer to buy. They compete for customer loyalty. Although all the
mentioned companies produce sneakers, their products are still unique because of each
brand's design and features.
Advantages and disadvantages of monopolistic competition
Just like any other market model, it has its pros and cons.

Disadvantages of Monopolistic Competition

1. Less Production Efficiency of Individual Firms
Monopolistic competition market disallows monopoly to be in place. There are many
competitors in the market. This results in difficulty for the companies to achieve economies
of scale. A company can not reach the optimum production efficiency capability due to the
unavailability of economies of scale.

2. Advertising Focus More Than Product Quality

Companies focus on advertising and promotional activities to set a particular product or
service as superior to competitors. The focus shifts from product improvement to
advertisements. This is a disadvantage from the consumer’s point of view.

3. Lack of Standardized Products

Since many firms pump investment into advertisements to increase sales, firms will not focus
on product quality. This will bring up the question of whether firms will produce
standardized products.

4. More Product Alternatives for Consumers

Consumers will be dissatisfied because there are many product alternatives available for
them. There will be many similar products in the market and customers will be misled to
choose the correct according to the expected quality.

5. Misleading Advertising
Since with the competition and substitutable products, firms will try to invest more and more
in advertising. Some advertisements will be false and misleading, uplifting the product
quality more than what it is, which is not a good situation from a consumer’s point of view.

Advantages of Monopolistic Competition

1. Few Barriers to Entry
Markets experiencing monopolistic competition has fewer barriers to entry. The advantage is
with both consumer point of view and industry as a whole. There will be new rivalries in the
market which brings a healthy situation for the industry. Also, consumers will not stagnate to
few products since there are more producers available.

2. Differentiated Products and Services

Consumers will get the freedom to experience different products and services in the
monopolistic competition market. When compared with a monopoly market, the number of
products is high in the monopolistic competition market.
3. A Large Number of Sellers / Producers
Since barriers to entry are low, there will be many sellers/producers who will join the market
continuously. This is a very positive factor for the consumers and the industry as a whole.

4. Consumer Has More Information

Usually, there is a high level of advertising in monopolistic competition firms. This provides
a greater advantage for the consumers with information and hence, lowers search costs. This
results in more informed consumers.

VIEW ON MONOPOLISTIC MARKETS

In my opinion, Monopolistic markets give small-scale industrialists a chance to innovate and
brainstorm new ideas to present in the market. With such a vast population, the possibility of
businesses flourishing is higher as the consumer's sole buying reason depends upon the
quality and unique designs. Monopolistic Markets are also posing a brighter side for the
GENz community consumers as their prime buying eye is not for the brand but the latest
designs and variety in the product. It also brings business opportunities to the current
entrepreneurs in the industry to make a mark in the market and increase employment scopes.

In addition, monopolistic competition thrives on innovation and variety. Companies must

continuously invest in product development and advertising and increase the variety of their
products to appeal to their target markets. Competition with other companies is thus based on
quality, price, and marketing.

Though Monopolistic Markets can also have an adverse effect on the economy. Industries
like fashion, with increased production in firms and regular modifications in designs,
accompany fast fashion. Fashion firms offer products that are highly similar, highly
substitutable, but not identical to products of branded firms. These cheaply made, trendy
pieces have resulted in an industry-wide movement towards overwhelming amounts of
consumption. This results in harmful impacts on the environment, garment workers, animals,
and, ultimately, consumers’ wallets.

Companies with superior brands and high-quality products will consistently make economic
profits in the real world. Companies entering the market will take a long time to catch up, and
their products will not match those of the established companies for their products to be
considered close substitutes. New companies are likely to face barriers to entry because of
strong brand differentiation and brand loyalty is another issue faced by monopolistic
competition.

Simply put, monopolistic competition is often considered inefficient because of the excess
funds companies spend on advertising and publicity instead of increasing the quality of their
products. However, this market model is realistic because many companies offer
differentiated goods, and there are still barriers to entry, albeit very low. That's why one can
see a lot of examples of such businesses around themselves.