The market of monopolistic competition

In this article, we will consider such a structure of the market, when it has a large number of sellers selling fairly close products, but not perfect substitutes for each other, in other words, the market of monopolistic competition. In this market, each manufacturer on the one hand is a monopolist, as it offers its own variant of the product, but it has competitors who sell similar products, but with some excellent characteristics.

The foundations of the model and the term "monopolistic competition market" were developed by Edward Chamberlain in 1933.

Features:

1. A significant number of sellers on the market.
2. Differentiation of products.
3. Rigid non-price competition.
4. Relatively low barriers.

Let's consider these features in more detail.

A large number of manufacturers

Like perfect competition, monopoly competition is characterized by a fairly large number of individual sellers. Each firm has only a small share of the industry market . As a consequence, such a firm is characterized by small size. On the one hand, this feature excludes the possibility of coordinating actions and collusion to increase the price of the goods or limit the release. On the other hand, small firms will not be able to influence the price level.

Differentiation of products

This characteristic is key for this market structure , since it presupposes the presence of sellers offering very similar but not similar products with homogeneous characteristics. Such goods are not perfect substitutes for each other.

Grounds for differentiation:

• Physical characteristics of products.
• Location.
• Imaginary differences associated with the brand, packaging, advertising, image of the company.

Also, the differentiation can be vertical and horizontal. Vertical differentiation implies the division of goods by quality into "good" and "bad", for example, the choice between the TV "Temp" and "Samsung". Horizontal differentiation involves the division of goods at roughly the same prices for those that correspond to the preferences of the consumer and do not correspond. For example, cars brands BMW and Audi.

Differentiation of goods allows firms to have a limited impact on the market price, since many buyers will most likely remain committed to a certain brand with a slight increase in the cost of production. But the market of monopolistic competition implies only a very limited influence of an individual firm. The indicator of cross elasticity on demand is quite high.

Barriers to entering the market

Entry into the industry for firms is not difficult. This is due to a small initial investment, a small scale effect, a small size of operating firms. However, entry to the market of monopolistic competition is still more difficult than in the conditions of perfect competition, since the new company will have to find a way to attract buyers of operating firms. And this will require additional costs from the seller.

Non-price competition

The market of monopolistic competition allows firms to use two main strategies of non-price influence on sales:

• Strengthen differentiation.
• Change the strategy of advertising and sales promotion.

Thus, monopolistic competition is the most realistic model for many industries, including retail, car market, household appliances, cosmetic and hairdressing services, and so on. With regard to material goods, it should be noted that the wholesale market of such products as, for example, soap, toothpaste, is oligopolous, since it does not have a large number, freedom of entry and small size, and the retail market is also an example of monopolistic competition.