Monopolistic Competition

The central feature of monopolistic competition is product differentiation, which gives every firm some market power with respect to its product. For instance, shirts of Allen Solly are not exactly the same as that of Park Avenue, but they are not too dissimilar either. Product differentiation occurs to a greater or lesser degree in such markets where large numbers of sellers or firms supply a small part of market share. Firms sell goods with different attributes claimed to be superior to those of competitors. They also deliver varying levels of support and service to the customers. Advertising and marketing, aimed at creating product or brand name allegiance, reinforce (real or perceived) product differences. Some customers may prefer Zodiac shirts, others Van Heusen and still others Reid and Taylor. Appendix 7C provides a discussion on product differentiation and branding.

Competing firms producing similar products are often called a product group' For instance, wrinkle free' shirts would be a typical product group within which there are no significant perceived differences among competitors. Similarly 'casual wear' brands like Indus plus, TNG casual, Free-look, Easios, Lawman and others may form a product group.

Some of the best examples of monopolistic competition can be found in the restaurants, grocery stores, dry-cleaners, stationery stores, florists, hardware stores, pharmacies and video rental stores. In these markets, entry is fairly easy and number of sellers is relatively large, however the firms within each of these markets differentiate themselves from competition on the basis of location, type of service or paraphernalia. Product markets of soaps, toothpastes, shampoos and vegetable oils also fall under monopolistic competition. In 1998-99, in India, there were 61 companies in the shop market and 255 in the vegetable oil market (CMIE estimates.)

Features of Monopolistic Competition

The basic market characteristics of a monopolistically competitive industry are as follows:

1.       There are a large number of firms (say, 20 to 100 or more) and every firm has a small market share.

2.       Every firm sells a differentiated product from its competitors and, therefore, it has some market power or monopoly advantage.

3.       Due to large number of firms, each firm acts independently and does not consider reactions of rivals in its decisions.

4.       There is free entry and exit of companies into and from the industry in the long run, which usually leads to lower market share and zero economic profits.

5.       Emphasis is laid on non-price competition, like product differentiation and advertising. Price competition helps the firm to operate on firm's demand curve, but price cuts can cause retaliation from competitors. 

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