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Unit 12: Monopolistic Competition

dominated by small and medium-sized businesses (SMEs) with over half the workforce Notes
(~58%) employed in either zero-employee enterprises e.g. sole traders or partnerships, or
businesses employing less than 10 people. Companies with less than 50 people accounted
for approx. 83% of the workforce.
The vehicle repair and servicing industry is diverse, being made up of general repairers,
specialist repairers (i.e. bodywork, electrics), dealers and petrol stations. With so many
garages, the industry has remained a highly competitive one. However, specialism and
locality enable the various garages to maintain a fairly constant degree of control over their
price.
Questions
1. With reference to economic theory, explain why the motor vehicle repair industry
might be regarded as “good example of a monopolistically competitive industry.”
2. The motor vehicle industry has been monopolistically competitive for many years.

What are the specific features of the motor vehicle repair industry that have restricted
the growth of large-scale operations, which might have led to a less competitive
market structure.

Source: This worksheet is based on John Sloman’s case study at www.pearsoned.co.uk/sloman

12.3 Monopolistic Competition and Advertising

Advertising is common a tool used by firms operating under monopolistic competition. It is

effectively used to create product differentiation and thereby acquire some degree of market
control so as to be able to charge a higher price.
Advertising can be substantiated as information provided by a company about its products
or services, usually through media such as television, radio, newspapers, magazines, and the
Internet, to promote or maintain sales, revenue, and/or profi t.

Advertising is used by these firms to accomplish two related goals:
1. Product differentiation
2. Market control
The degree to which a firm can inform buyers about physical differences or create the perception

of such differences influences the product differentiation.
Product differentiation brings with it market control. If advertising convinces buyers that a good
is better than the other available comparable products, then a firm can charge a higher price.

Figure 12.4 shows the demand curve facing a monopolistically competitive firm, Everest Masala
for its famous Spice powders. Everest thinks that it can enhance the sales of spice powder packets

and hence, profitability through advertising.

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