Imperfect Competition - Monopolistic Competition

Monopolistic competition :



Meaning and Definition :
Monopolistic competition is very realistic in nature. In this market there are some features of perfect competition and some features of monopoly acting together. Prof. E. H. Chamberlin coined this concept in his book “Theory of Monopolistic Competition” which was published in 1933. According to Chamberlin, “Monopolistic competition refers to competition among a large number of sellers producing close but not perfect substitutes.” 

Following are the main features of monopolistic competition :
1) Fairly large number of sellers :
In monopolistic competition, the number of sellers is large but comparatively it is less than that of perfect competition. Due to this reason sellers’ behaviour is like monopoly.
2) Fairly large number of buyers :
In this market there are fairly large number of buyers. Consequently, no single buyer can influence the price of the product by 
changing his individual demand.
3) Product differentiation :
Product differentiation is the main feature of monopolistic competition. In this market, there are many firms producing a particular product, but the product of each firm is in some way differentiated from the product of every other firm in the market. This is known as product differentiation. Product differentiation may take the form of brand names, trade marks, peculiarity of package or container, shape, quality, cover, design, colour etc. This means that the product of a firm may find close substitutes and its cross elasticity of demand is very high. For example, mobile handsets, cold drinks etc.
4) Free entry and exit :
Under monopolistic competition there is freedom of entry and exit, that is new firms are free to enter the market if there is profit. Similarly, they can leave the market, if they find it difficult to survive.
5) Selling Cost :
Selling cost are peculiar to monopolistic competition only. It refers to the cost incurred by the firm to create more demand for its product and thus increase the volume of sales. It includes expenditure on advertisements, readio and television broadcasts, hoardings, exhibitions, window display, free gifts, free samples etc.
6) Close substitutes :
In monopolistic competition, goods have close substitutes to each other. For example, different brands of soaps, toothpastes etc.
7) Concept of group :
Under monopolistic competition, Chamberlin introduced the concept of ‘Group’ in place of industry. Industry means the number of firms producing identical products. A ‘Group’ means a number of firms producing differentiated products which are closely related. For example, group of firms producing medicines, automobiles etc.