MONOPOLISTIC COMPETITION

•     MONOPOLISTIC COMPETITION

•     MICRO ECONOMICS/MANAGERIAL ECONOMICS/CA/CS FOUNDATION BUSINESS ECONOMICS

•     BY DR SHASHI AGGARWAL

•     IMPORTANT QUESTION

•     HOW THE PRICE AND OUTPUT IS DETERMINED UNDER MONOPOLISTIC COMPETITION

•     OR EXPLAIN THE SHORT RUN AND LONG RUN EQUILIBRIUM UNDER MONOPOLISTIC COMPETITION

1.       ANSWER : MEANING AND DEFINITION

2.       FEATURES

3.       SHAPE OF DEMAND AND COST CURVE

4.       SHORT RUN EQUILIBRIUM

5.       LONG RUN EQUILIBRIUM

•     INTRODUCTION

•     THE CONCEPT OF IMPERFECT OR MONOPOLISTIC COMPETITION IS RELATIVELY NEW CONCEPT

•     IT WAS IN 1926 THAT PROF. PIERRO SRAFFA FIRST OF ALL MADE A REFERENCE TO IMPERFECT COMPETITION

•     IMPERFECT COMPETITION IS A WIDE TERM WHICH INCLUDES SUCH MARKET SITUATIONS AS

1.       MONOPOLISTIC COMPETITION

2.       OLIGOPOLY

3.       DUOPOLY

•     MONOPOLISTIC COMPETITION

1.       COMBINATION OF BOTH PERFECT COMPETITION AND MONOPOLY

2.       PERFECT COMPETION BECAUSE THE NUMBER OF SELLERS IS LARGE AND AN INDIVIDUAL SELLER CAN NOT INFLUENCE THE MARKET PRICE

3.       MONOPOLY BECAUSE EACH FIRM HAS APROTECTED MARKET FOR ITS OWN PRODUCT AND HAS A NEGATIVELY SHAPED DEMAND CURVE

4.       THAT MARKET SITUATION IN WHICH LARGE NUMBER OF PRODUCERS PRODUCE THE GOODS WHICH ARE CLOSE SUBSTITUTE OF EACH OTHER

5.       PRODUCT DIFFERENTIATION IS THE HALL MARK OF MONOPOLISTIC COMPETITION

•     INTRODUCTION

1.       MRS JOAN ROBINSON AND PROF CHAMBERLIN IN 1933 DEVELOPED THE CONCEPT OF MONOPOLISTIC COMPETITION IN PROPER FORM

2.       IN REALITY PRODUCER PRODUCE A VARIETY OF GOODS IN THE MARKET AND COMPETE WITH ONE ANOTHER ON ACCOUNT OF DIFFERENCE IN THEIR SHAPE,SIZE ,COLOUR ,QUANTITY ETC AND ON THE OTHER HAND PRODUCER IS A MONOPOLIST OF HIS OWN BRAND OF THE COMMODITY

•     MONOPOLISTIC COMPETITION

1.       WHERE IN THERE ARE MANY SELLERS OF A COMMODITY BUT THE PRODUCT OF EACH SELLER IS DIFFERENT FROM THE PRODUCT OF THE OTHER SELLER IN ONE WAY OR THE OTHER

2.       PRODUCT DIFFERENTIATION MAY BE IN THE FORM OF DIFFERENCE IN BRAND NAME,TRADE MARKS,QUALITY AND PACKING ETC

3.       ACCORDING TO MR CHAMBERLIN ONE OF MAIN FEATURE OF MONOPOLISTIC COMPETITION IS PRODUCT DIFFERENTIATION, MEANS GOODS ARE CLOSE SUBSTITUE BUT ARE NOT HOMOGENEOUS. THEY DIFFER IN COLOUR,NAME ,PACKING SIZE AND QUALITY. AIM OF PRODUCT DIFFERNETIATION IS TO INCREASE PROFIT

•     MEANING AND DEFINITION

•     J.S BAINS,” MONOPOLISTIC COMPETITION IS MARKET STRUCTURE WHERE THERE IS LARGE NUMBER OF SMALL SELLERS, SELLING DIFFERENTIATED BUT CLOSE SUBSTITUTE PRODUCTS.

•     LEFTWICH,” MONOPOLISTIC COMPETTION REFERS TO THAT MARKET ORGANIZATION IN WHICH THERE ARE MANY OF SELLERS OF A PARTICULAR PRODUCT BUT THE PRODUCT OF EACH SELLER IS IN SOME WAY DIFFERENTIATED IN THE MINDS OF CONSUMER FROM THE PRODUCT OF EVERY OTHER SELLER

•     FEATURES

1.       LARGE NUMBER OF FIRMS AND BUYERS: LARGE NUMBER OF BUYERS AND SELLERS BUT THE SIZE OF EACH FIRM IS SMALL. EACH FIRM HAS LIMITED CONROL OVER THE MARKET AND EACH FIRM HAS DECIDE ITS OWN PRICE POLICY INDEPENDENTLY

2.       PRODUCT DIFFERENTIATION MEANS WHEREIN THE BUYER CAN DISTINGUISH ONE PRODUCT FROM THE OTHER. IT ARISES DUE TO DIFFERENCE IN SHAPE,COLOUR,DURABILITY,QUALITY AND SIZE ETC

3.       FREEDOM OF ENTRY AND EXIT OF THE FIRMS

4.       SELLING COSTS

5.       PRICE POLICY :

6.       LIMITED MOBILITY

7.       IMPERFECT KNOWLEDGE

8.       NON PRICE COMPETITION : DIFFERENT FIRM COMPETE WITH ONE ANOTHER WITHOUT LOWERING THE PRICE OF THE PRODUCT, FIRMS COMPETE WITH ONE ANOTHER IN OFFERING GIFTS FREE AND OTHER SERVICES TO ATTRACT MORE AND MORE CUSTOMERS.

•     SHAPE

•     DEMAND CURVE 

•     BECAUSE OF PRODUCT DIFFERENTIATION  DEMAND CURVE OF A FIRM UNDER MONOPOLISTIC COMPETITION IS DOWNWARD SLOPING

•     MR CURVE IS DOWNWARD SLOPING

•                                  

•     COST CURVES

AC,AVC AND MC ARE U SHAPED

ACCORDING TO CHAMBERLIN THE SHAPE OF SELLING COST IS ALSO U SHAPED

•     SHORT PERIOD EQUILIBRIUM IN MONOPOLISTIC COMPETITION

•     SHORT RUN REFERS TO THAT TIME PERIOD IN WHICH PRODUCTION CAN BE INCREASED ONLY UP TO EXISTING PRODUCTION CAPACITY IN RESPONSE TO INCREASE IN DEMAND

•     FIXED AND VARIABLE FACTORS OF PRODUCTION

•     THE FIRM WILL BE IN EQUILIBRIUM WHEN THE MR=MC AND MC MUST CUT MR FROM BELOW

•     PROFIT AVAILABLE DEPENDS UPON THE DEMAND FOR THE GOODS AND EFFICIENCY OF THE FIRM AND FIRM MAY FACE THREE SITUATIONS :

1.       SNP

2.       NP

3.       MINIMUM LOSSES

•     SUPER NORMAL PROFIT

•     MC =MR AND MC MUST CUT MR FROM BELOW.

•     FIRM EARNS SNP AS AR IS MORE THAN AC

•     NORMAL PROFIT  

•     MC=MR

•     MC MUST CUT MR

•     FROM BELOW

•     NORMAL PROFIT MEAN =AR=AC   

•      MINIMUM LOSSES

•     LONG RUN EQUILIBRIUM

•     LONG PERIOD IS THAT TIME PERIOD IN WHICH EVERY FIRM CAN CHANGE ITS PRODUCTION CAPACITY IN RESPONSE TO CHANGE IN DEMAND

•     FIRM CAN CHANGE ITS SIZE OF ITS PLANTS AND MACHINERY AND NEW FIRMS CAN ENTER AND OLD FIRMS CAN EXIT

•     IF THE FIRM EARNS SNP THEN SEVERAL NEW FIRMS WILL ENTER THE INDUSTRY AND SUPPLY WILL INCREASE AND SNP WILL BE CONVERTED TO NP

•     IN THE LONG RUN IF THE FIRMS SUFFER LOSS THEY WILL EXIT THE SUPPLY WILL LESS AND FIRMS WILL EARN NORMAL PROFIT DUE TO RISE IN PRICE.

•     ACCORDING TO CHAMBERLIN IN THE LONG RUN FIRMS TEND TO EARN  NORMAL PROFIT AND EXCEPTION IS THERE MORE EFFICIENT FIRM MAY EARN SNP

•     LONG RUN

•     NORMAL PROFIT

•     EXCESS CAPACITY

•     UNDER MONOPOLISTIC COMPETITION LONG RUN AVERAGE CURVE IS NOT MINIMUM AT EQUILIBRIUM POINT NOR IS THE PRODUCTION OPTIMUM. PROFESSOR LIPSY DESCRIBED EXCESS CAPACITY. IT LEADS TO THE FOLLOWING CONCLUSION:-

1.       EARNS ONLY NORMAL PROFIT

2.       PRICE IS HIGHER THAN PERFECT COMPETITION

3.       LEVEL OF PRODUCTION IS LESS THAN OPTIMUM