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Unit 12: Monopolistic Competition

Provisional Results for 1997-98 in ` Crores Notes

But whatever the future market, it is clear that Maruti will have a large unutilised capacity.
Even assuming that the company can grab as much as 30,000 more cars, its total sales in
1999-2000 will be below 4 lakh cars per year.
But while the company builds up idle capacity with no new models it has to consider the
depreciation costs of the new plant. This will dent the bottomline even more. According to
Maruti, depreciation cost will go up ` 150 crores in 1999-2000.
The options for Maruti are limited: it has to get its new cars on the roads as early as possible.
One option that the board will consider is to import completely knocked down (CKD) kits
of the new cars which will be available in Japan from October. But the cost of the CKDs
will be prohibitive and Maruti will have to subsidise them, which would hit margins and
profits. The alternative is for the Maruti board to convince the Japanese parent to subsidise

the CKDs for a year before the model is indigenised. Either way, Maruti’s future is troubled
(Business Standard, August 98).
Question
Discuss Maruti’s situation in the light of monopolistic competition.

12.4 Summary

Monopolistic competition is a form of market structure in which a large number of

independent firms are supplying products that are slightly differentiated.

When firms are competing only through price changes, there are three cases of long run
equilibrium of a typical firm under monopolistic competition.

The long run equilibrium can be seen under three situations: when competition takes place

only through the entry of new firms, when competition takes place only through price
variations and when competition arises through price variation and new entry.

Advertising is commonly used by firms operating under monopolistic competition as a
way to create product differentiation and thus to acquire some degree of market control
and thus charge a higher price.
12.5 Keywords

Actual demand: The actual changes in demand arising from simultaneous reduction in price.
Advertising: any paid form of non-personal presentation of a product, idea, or organization

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