Monopolistic competition

economic-dictionary

Monopolistic competition is a type of imperfect competition in which there are a high number of sellers in the market who have a certain power to influence the price of their product.

The products offered are characterized by having a certain differentiation and it is precisely this differentiation that makes these companies enjoy certain market power, have a certain voice when setting their prices and are not merely "price-accepting". as in the case of perfect competition. Therefore, the graphic representation of monopolistic competition will be the one on the right, imperfect competition.

Characteristics of a monopolistically competitive market

Therefore, in general terms, the characteristics of this type of market would be the following:

  • There are a large number of sellers or bidders.
  • The products offered are not homogeneous. That is, there is differentiation in the products. This differentiation can occur in aspects such as quality, after-sales service or location.
  • Companies are free to enter and exit the market.

In the short term, monopolistic competition is similar to monopoly, since companies have a certain market power, but in the long term, due to the fact of having freedom of entry and exit in the market, if the companies that are within this market they have benefits, new companies will enter the market making competition, so the benefits of the alleged differentiation will decrease, causing the original companies to lose the market power they had.

Therefore, the fact that in monopolistic competition the long-term profit is zero is what differentiates it from a monopoly, where because there is no freedom to enter and exit the market, it is possible to obtain long-term benefits.

Examples of markets in monopolistic competition

As an example we could name the children's clothing market. The companies do not sell identical clothes, but rather they differ in quality, design, service in the sale ... This can make each company have a certain market power by modifying prices, without any of them being the one with the dominant power in the market. children's clothing market.

There are many examples of monopolistic competition, but nevertheless, in many of them, although a large number of companies operate, there are two or three that have a greater power than the rest, and sometimes, this may seem more like an oligopolistic market than one of monopolistic competition. It occurs, for example, with the case of fast food, which despite having the characteristics of a monopolistically competitive market, is clearly led by two (McDonald's and Burger King).

In the following table you can see all the types of market in imperfect competition:

Market structureNumber of bidders and degree of product differentiationDegree of control over priceExample
MonopolyA single bidder, there are no substitute productsFullDrinking water services monopoly (unregulated)
OligopolyFew suppliers with homogeneous or differentiated productsAnyManufacture of Vehicles (differentiated) or Manufacture of chemical products (undifferentiated)
Monopolistic competitionMany bidders with differentiated productsAnyFast food
MonopsonySingle plaintiffFullPublic work
OligopsonyFew plaintiffsAnyLarge distributors
Market structure Difference between monopoly and oligopoly Price discrimination

Tags:  USA derivatives Colombia 

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