Price Determination under

Monopolistic Competition
Introduction
 Another term for imperfect competition.
 Monopolistic competition is the situation of the market
wherein there are many sellers of a commodity, but the
product of each seller is different from the product of other
sellers in one way or other.
 According to J.S Bains: “ Monopolistic competition is
found in the industry where there is a large number of small
sellers, selling differentiated but close substitute products.”
 The model of monopolistic competition describes a
common market structure in which firms have many
competitors, but each one sells a slightly different product.
Features of Monopolistic competition
 Large number of buyers
 Large number of sellers
 Product differentiation
 Freedom of entry and exit of firms
 Selling cost- Advertisement
 Imperfect knowledge
 Each firm makes independent decisions about price
and output, based on its product, its market, and its 
costs of production.
 Demand curve is more elastic
Price and Equilibrium under
Monopolistic competition
 Under monopolistic competition , price and
equilibrium are determined by two different
approaches:
a) Total Revenue and Total Cost Approach
b) Marginal Revenue and Marginal Cost Approach
Total Revenue and Total Cost Approach
Marginal Revenue and Marginal Cost
Price determination under monopolistic
in the short period
 A monopolistic firms is in equilibrium may face any of
three situations in the short period:
a) Super normal profit
b) Normal profit
c) Minimum losses
Super Normal Profits
Normal profits
Minimum losses
Long run equilibrium in Monopolistic
competition
 In long run, firms earn normal profit only.
 In long period, every firm can change its production
capacity according to change in demand.
Group equilibrium
 Under this, there are many firms producing close
substitutes.
 Chamberlin has used the term “Group” instead of industry
for the group of such firms as produce differentiated
products.
 Group equilibrium can be determined by taking following
two assumptions:
a) Demand and Cost of all firms of a group are the same.
b) Number of firms in the group is so large that no
individual firm can influence the price and output.
Diagram is mention in notes…
Selling cost
 Selling cost is defined as costs necessary to persuade a
buyer to buy one product rather than another or to buy
from one seller rather than another.
 The total cost of marketing, advertising, and selling a
product.
Excess Capacity
 It is difference between optimum output and actual
output in the long run equilibrium.
 Optimum output may be regarded to be the output
where long run average cost is minimum.
 Excess Capacity = Optimum Output- Actual Output