Page 273 - DECO401_MICROECONOMIC_THEORY_ENGLISH

Microeconomic Theory

Notes Introduction

Till now we have studied two ultimate conditions of market—perfect competition and monopoly. But
in actual life, middle condition is found, which is known as Imperfect Competition. In economics,
conditions of imperfect competition were studied after 1993. This year, in England, book Economics of
Imperfect Competition of Ms. Joan Robinson and in America, book Theory of Monopolistic Competition of
Chamberlin have been published. Imperfect Competition is a wide term in which following situations
of market are included (1) Monopolistic Competition: many sellers come under it. (2) Oligopoly: only
some sellers come under it. (3) Duopoly: only two sellers come under it.

14.1 What is Monopolistic Competition?

Monopolistic Competition is that condition of market in which there are many sellers of any
commodity but commodity of every seller is different from commodities of other sellers in any
way. Therefore, product differentiation is main quality of monopolistic competition. Product
differentiation can be in the way of brand’s name, trademark, differences in properties, packing or
services given to customer or differences in services. Many examples of this type of competition are
found in actual life. Firms producing toothpaste like Forhans, Colgate, Pepsodent, Cibaca, Babool etc.
are the examples of monopolistic competition. In this type of market situation, there are firm monopolies
and also the competitor, firm monopolies are there because it has limited control on commodity due to
the product differentiation. In accordance with, demand curve of every firm like monopoly is negative.
For example, Lux trademark of Hindustan Lever Ltd. has monopoly. Any other firm cannot use it. But
other firms can produce bath soap like Hamam, Breeze, Camay, Dettoll etc. under its trademark. In
other words, there is freedom of producing substitute of ‘Lux’ soap. In this situation of market, element
of competition is due to many sellers of commodity and firms have the freedom of entry and exit.
According to J. S. Bains, “Competition is found in the industry where there is a large number of small
sellers, selling differentiated but close substitute products.”
In the words of Baumol, “The term monopolistic competition refers to the market structure in which
sellers do have a monopoly (they are the only sellers) of their own product, but they are also subject
to substantial competitive pressures from sellers of substitute product.”

Self Assessment

Fill in the blanks:
1. As a result of product differentiation ........................... partial restriction on price.
2. Product differentiation is the ........................... of monopoly.
3. Sources of production and commodities and ........................... not in monopolistic competition.
4. Cost of every firm is affected by ........................... cost of its competitors in market for a long time.

14.2 Characteristics of Monopolistic Competition

Following are the main characteristics of Monopolistic Competition—
1. Large Number of Firms and Buyers: Firm producing differentiated product and sellers are large in
numbers in monopolistic competition.
2. Product Differentiation: Product differentiation is the main feature of monopolistic competition.
Product differentiation means that product of different types, brands, and qualities will be available
to customers in a fixed time period. Product differentiation occurs when buyer of product can
differentiate between two products. In this, firms are in large number but their products are different

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