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Monopolistic Competition. Concept, Advantages and Limitations - Essay Example

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This paper explores distinctive characteristics of the monopolistic competition, its advantages and disadvantages, as compared with other types of market. Monopolistic competition is a market with several firms producing the same commodity or service but having no exact substitute of their produce…
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Monopolistic Competition. Concept, Advantages and Limitations
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Download file to see previous pages These factors could be the brand name, brand personality, quality etc. Examples of firms competing in the monopolistic market are clothing brands, restaurants, and other service industries. This kind of competition is termed as monopolistic because each firm has its unique position in the market despite the presence of several other competitors. They usually have a loyal customer base that comprises of people who are not frequent switchers. Switching is generallyassociated with some sort of dissonance occurring in the whole buying experience and customers are generally indifferent to small price fluctuations. As far as the market is concerned, it has certain key characteristics including: presence of many firms selling the same commodity with a slightvariance also known as a Unique Selling Proposition (USP) that makes them stand out amongst the market clutter. Product may have substitutes but the exact identical cannot be present due to its unique differentiating factors that are not based on prices. Customers have lesser control over prices as compared to the producers. Prices are also unlikely to be influenced by the competition. Market leadership can be attained but by a small margin and on the basis of captured market share. There are no serious barriers to entry as compared to other market competition types. Production is usually lesser than the capacity and is based on carefully calculated demand. There are several problems associated with monopolistic competition that have been identified by several economists. Firstly, this form of competition will lead to no economic profits in the long run. This is because here are likely to be more market runners after some years and they will offer better incentives or differentiating factors if the current...
This paper offers a comprehensive theoretic analysis of the monopolistic competition, as a type of economic market. The limitations of that type of market, as well as its advantages and disadvantages to producers, customers and the economy as a whole are considered. Monopolistic competition refers to several different market players with unique differentiating factors
The firms operating in monopolistic competition are also inefficient as they do not produce at the optimum level. Inefficiency, in economic terms, means that the available resources are not use at the optimal bringing down the chances of incurring lower cost with every marginal product.
This form of competition will lead to no economic profits in the long run. This is because here are likely to be more market runners after some years and they will offer better incentives or differentiating factors if the current firms do not invest heavily in product research and revamping. This, too, will be an addition to the costs and in the long run, the convenient and inevitable influx of new competition will result in minimal or no economic profits. In order to minimize future losses and build customer loyalty , focus should be on the quality management and customer service as advertising and marketing campaigns, packaging and ambiance stay for some time until a prospective market leader enters the picture and replicates it.
Negative aspect of monopolistic competition is that firms engage in misleading advertising and focus less on quality control after sometime.
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