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Unit-14: Theory of Monopolistic Competition

from each other in anyway, but these products are close substitutes of each other. Product Notes
differentiation is obtained due to characteristic of product like shape, measurement, colour, durability,
quality etc. There are many examples of product differentiation like bath soaps Lux, Godrej, Camay,
Rexona, etc. in tea, Lipton, Brooke Bond etc., in toothpaste, Pepsodent, Colgate, Forhans etc.
3. Freedom of Entry and Exit of Firms: In the situation of monopolistic competition there is freedom of
entry and exit of firms in the industry like perfect competition. It should be noticed that Chamberlin
has used group at the place of industry for group
of firms which produce differentiated products Why do Producers want to
under the monopolistic competition. Differentiate their Production?
4. Selling Cost: An important characteristic of — As a result of product differentiation, partial
monopolistic competition is that every firm spends restriction is possible on cost.
more money in promoting its product under it.
Firm gives advertisements in newspapers, — As a result of product differentiation, possibility
cinemas, magazines, radio, T.V. etc. for selling its increases of increase in part of producer in selling
in market.
product in the maximum amount. The investment
done on all these is called as Selling Costs.
5. Price Control: Every firm has limited control on the cost of product. Average income and limit-
end income curve of a firm fall down like monopoly in monopolistic competition. It means that
in this situation, firm can slow down the price for selling more products and raise price for fewer
products. In monopolistic competition, a firm has control on cost of its production due to the product
differentiation. But due to the availability of close substitute of opposite product firms do not have
full control on cost in monopolistic competition. The cost of every firm is affected by cost policy of
its competitors in market up to the certain limit.
6. Limited Mobility: In monopolistic competition, sources of production and products and do not
have mobility in services.
7. Imperfect Knowledge: In the situation of monopolistic competition, buyers, sellers of products,
and owners of sources do not have knowledge of different prices of product. The reason is that
comparison between productions of different firms is not possible due to product differentiation.
Customers are fond of the production of any one specific firm. They only buy the production of that
firm even if it costs higher than others. In this way even sources of production are not able to know
fully that how much the different firms are costing to the sources of services.
8. Non-Price Competition: The main characteristic of monopolistic competition is that under it different
firms without changing the costs of products compete with each other like the example of companies
producing ‘Surf’ and ‘Ariel’. If you take a box of ‘Surf’, you will get a glass utensil similarly, with the
box of ‘Ariel’ you will get the steel spoon. In this way, firms, by providing different types of facilities
and products etc. to customers to attracts them toward their products. This type of competition is
called as Non-Price Competition.

14.3 Profit Maximization or Equilibrium Under Monopolistic
Competition
or
Determination of Price and Output Under Monopolistic
Competition
Intention of every production is to make maximum profit even in the situation of monopolistic competition.
We have already seen that maximum profit occurs when marginal revenue is equal to marginal cost.
Marginal revenue is not equal to average revenue like perfect competition in the situation of monopolistic
competition. In the situation of monopolistic competition, if any firm wants to sell maximum quantity of
its production then it has to decrease the cost. That’s why, in the situation of monopolistic competition,

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