Page 180 - DECO405_MANAGERIAL_ECONOMICS

Pavitar Parkash Singh, Lovely Professional University
Unit 11: Monopolistic Competition

Unit 11: Monopolistic Competition Notes

CONTENTS
Objectives

Introduction
11.1 Features of Monopolistic Competition

11.2 Price and Output Decisions
11.3 Application of Monopolistic Competition

11.4 Summary
11.5 Keywords

11.6 Self Assessment
11.7 Review Questions

11.8 Further Readings

Objectives

After studying this unit, you will be able to:
State the features of monopolistic competition

Discuss the short run and long run equilibrium of a monopolistic firm

Introduction

Monopolistic competition has an element of product differentiation. We can define a monopolistic
competitive market as a market in which there are a large number of firms and the products in
the market are close but not perfect substitute. The real world is widely populated by monopolistic
competition. Perhaps half of the economy's total production comes from monopolistically
competitive firms. The best examples of monopolistic competition come can be retail trade,
including restaurants, clothing stores, and convenience stores.

11.1 Features of Monopolistic Competition

Monopolistic competition is a form of market structure in which a large number of independent
firms are supplying products that are slightly differentiated from the point of view of buyers.
Thus, the products of the competing firms are close but not perfect substitutes because buyers do
not regard them as identical. This situation arises when the same commodity is being sold under
different brand names, each brand being slightly different from the others. For example, Lux,
Liril, Rexona, Hamam, etc., are brands of toilet soap, or Colgate, Cibaca, Prudent, Promise, etc.,
brands of toothpaste.

Each firm is, therefore, the sole producer of a particular brand or "product". It is a monopolist as
far as that particular brand is concerned. However, since the various brands are close substitutes,
a large number of "monopoly" producers of these brands are involved in keen competition with

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