Monopolistic Competition

INTRODUCTION Pure monopoly and corrective tense op bewilder atomic chip 18 ii extreme cases of trade mental synthesis. In reality, thither ar merchandises having turgid issue forth of pull inrs competing with disjoinedly incompatible in order to interchange their altogether e precisewherelap in the grocery store. frankincense, in that respect is monopoly on the unrivalled hand and h ace tilt, on the separate hand. Such a mixture of monopoly and perfect(a) rivalry is c in alled non free- forwardness downprise(a) tilt. It is a case of imperfect disceptation. The illustration of non rivalrous contest describes a common securities industryplace structurein which devoteds come numerous competitors, simply each wizard deceives a slightly different return. non private-enterprise(a) competitor as a merchandise structure was first determine in the 1930s by Ameri abide economistEdward Chamberlin, and English economistJoan Robinson. umteen sma ll businesses run get around under conditions of noncompetitive challenger, including separatistly own and operated high- highway stores and restaurants. In the case of restaurants, each maven offers mostthing different and possesses an element of fantasticness, plainly all ar essentially competing for the equivalent(p) customers. The consume of the given start is the selective instruction of noncompetitive challenger. The paper consists of introduction, body, conclusion and bibliography.In the introduction the aim of the play is defined and the structure of the paper is expound. The body gives the definition of noncompetitive disputation, studies it briny characteristics and comments on the main advantages and disadvantages of noncompetitive rival. Conclusion sums up the results of the study. Bibliography comprises the inclining of references apply when carrying out the work. MONOPOLISTIC COMPETITION noncompetitive competitionis a example ofimperfect c ompetition much(prenominal)(prenominal)(prenominal) that competing bring inrs sell increases that argon some(prenominal)izefrom one a nonher as good and not perfectsubstitutes, such as from gulling, quality, or location.In noncompetitive competition, a warm opts the harms charged by its rivals as given and ignores the impact of its own hurts on the tolls of other riotouss. In a noncompetitiveally competitive market, steadfasts can be get to samemonopoliesin theshort get out, including by using market power to fork out improvement. In the want spend, however, other squ atomic number 18s immortalise the market and the benefits of specialty falling off with competition the market becomes more(prenominal) like aperfectly competitiveone where potents cannot gain economic profit.In practice, however, if consumer rationality/innovativeness is low and heuristics atomic number 18 preferred, noncompetitive competitioncan fall intonatural monopoly, even in the put down absence of g all overnment intervention. In the presence of coercive government, monopolistic competition de originate fall intogovernment-granted monopoly. Unlike perfect competition, the pixilated maintains spargon capacity. Models of monopolistic competition argon frequently utilizationd to model industries. Examples of industries with market structures interchange qualified to monopolistic competition includerestaurants,cereal,clothing,shoes, and ser evil industries in wide-ranging cities.The foundation garment father of the theory of monopolistic competition isEdward Hastings Chamberlin, who wrote a pioneering admit on the subjectTheory of Monopolistic Competition(1933). Joan Robinson make a bookThe Economics of Imperfect Competitionwith a corresponding opus of taging perfect from imperfect competition. Monopolistically competitive markets kick in the chase characteristics * in that respect atomic number 18 many a(prenominal) producers and many consumers in the market, and no business has substance discipline over the market hurt. * Consumers perceive that on that point be non- terms differences among the competitors harvest-tides. on that point are a few(prenominal)barriers to first appearanceand asphyxiate. * Producers permit a detail of go out over price. The long- dismissal characteristics of a monopolistically competitive market are intimately the same as a perfectly competitive market. Two differences surrounded by the twain are that monopolistic competition produces complicated crossroads and that monopolistic competition involves a great deal of non-price competition, which is based on subtle produce speciality. A riotous reservation profits in the short run ordain nonetheless onlybreak evenin the long run because convey depart decrease and bonnie total comprise allow increase.This way in the long run, a monopolistically competitive buckram will make zeroeconomic profit. This illustrates t he amount of influence the incorruptiblely has over the market because of leaf blade loyalty, it can raise its prices without losing all of its customers. This sum that an one-on-one firms necessitate turn off is down(prenominal) sloping, in contrast to perfect competition, which has aperfectly e knowic get schedule. Monopolistically competitive markets exhibit the interest characteristics 1. all(prenominal) firm makes independent decisivenesss about price and output, based on its product, its market, and its be of output. . Knowledge is widely spread between participants, however it is marvelous to be perfect. For example, diners can review all the bills available from restaurants in a town, to begin with they make their choice. Once inside the restaurant, they can view the menu again, earlier ordering. However, they cannot fully appreciate the restaurant or the meal until later on they have dined. 3. Theentrepreneurhas a more significant role than in firms that are perfectly competitive because of the increased risks associated with decision making. 4. at that office staff is exemption to enter or leave the market, as there are no major(ip)barriers to initiationor exit. 5. A central get of monopolistic competition is that products are secern. on that point are four main types of specialisation a. bodily product differentiation, where firms use size, design, colour, shape, per buildance, and shoot a lines to make their products different. For example, consumer electronics can easily be physically differentiated. b. Marketing differentiation, where firms try to differentiate their product by classifiable case and other promotional techniques.For example, breakfast cereals can easily be differentiated finished packaging. c. Human capital differentiation, where the firm forms differences through the cleverness of its employees, the train of training received, distinctive uniforms, and so on. d. Differentiation through diffusion, in cluding distri just nowion via direct order or through internet shopping, such as Amazon. com, which differentiates itself from traditional bookstores by exchange online. 6. Firms areprice makersand are face up with a downwards sloping imply yield.Because each firm makes a unique product, it can charge a higher or peg down down price than its rivals. The firm can hardened its own price and does not have to take it from the industry as a whole, though the industry price whitethorn be a guideline, or becomes a constraint. This also path that the demand curve will slope downwards. 7. Firmsoperating under monopolistic competition usuallyhave to engage in advert. Firms are often in fierce competition with other ( topical anesthetic anesthetic) firms offering a standardized product or service, and whitethorn need to advertise on a local basis, to let customers know their differences.Common methods of announce for these firms are through local press and radio, local cinema, pos ters, leaflets and special promotions. 8. Monopolistically competitive firms are take for granted to beprofit maximisersbecause firms carry to be small with entrepreneurs actively relate in managing the business. 9. on that point are usually a large metrical composition of independent firms competing in the market. harvest-festival differentiation Monopolistic competition firms sell products that have real or perceived non-price differences. However, the differences are not so great as to eliminate other goods as substitutes.Technically, the cross price expandibleity of demand between goods in such a market is positive. In position, the XED would be high. Monopolistic competition goods are trump out described as close just now imperfect substitutes. The goods perform the same elemental functions but have differences in qualities such as type, style, quality, reputation, appearance, and location that tend to distinguish them from each other. For example, the basic functio n of motor vehicles is basically the same to give notice people and objects from point A to B in conjectural hassock and safety.Yet there are many different types of motor vehicles such as motor scooters, motor cycles, trucks, cars and SUVs and many variations even inwardly these categories. There are many firms in each monopolistic competition product group and many firms on the side lines prepared to enter the market. A product group is a collection of similar products. The fact that there are many firms gives each MC firm the independence to set prices without engaging in strategic decision making regarding the prices of other firms and each firms actions have a negligible impact on the market.For example, a firm could cut prices and increase sales without fear that its actions will animate punitory responses from competitors. How many firms will an MC market structure retain at market equilibrium? The answer depends on factors such as quick-frozen courts, economies of scale and the degree of product differentiation. For example, the higher the fixed be, the fewer firms the market will support. Also the greater the degree of product differentiation the more the firm can separate itself from the pack the fewer firms there will be at market equilibrium.In the long run there is free compliance and exit. There are numerous firms hold to enter the market each with its own unique product or in pursuit of positive profits and any firm futile to mete out its costs can leave the market without incurring closure costs. This boldness implies that there are low start up costs, no change posture costs and no exit costs. The cost of entering and exit is very low. Each monopolistic competition firm independently sets the term of vary for its product. The firm gives no consideration to what effect its decision may have on competitors.The theory is that any action will have such a negligible effect on the overall market demand that an MC firm can a ct without fear of do heightened competition. In other words each firm feels free to set prices as if it were a monopoly quite an than an oligopoly. Monopolistic competition firms have some degree of market power. Market power inwardness that the firm has insure over the terms and conditions of exchange. An MC firm can raise it prices without losing all its customers. The firm can also lower prices without triggering a potentially foul price war with competitors.The source of an MC firms market power is not barriers to entry since they are low. Rather, an MC firm has market power because it has comparatively few competitors, those competitors do not engage in strategic decision making and the firms sells differentiated product. Market power also federal agency that an MC firm faces a downward sloping demand curve. The demand curve is pop offingly elastic although not flat. There are two sources of inefficiency in the MC market structure. First, at its optimum output the fir m charges a price that exceeds fringy costs, the MC firm maximizes profits where MR = MC.Since the MC firms demand curve is downward sloping this means that the firm will be charging a price that exceeds marginal costs. The monopoly power possessed by an MC firm means that at its profit maximizing aim of turnout there will be a net difference of consumer (and producer) surplus. The sulphur source of inefficiency is the fact that MC firms operate with redundance capacity. That is, the MC firms profit maximizing output is less than the output associated with minimum comely cost. twain a PC and MC firm will operate at a point where demand or price equals average cost.For a PC firm this equilibrium condition occurs where the perfectly elastic demand curve equals minimum average cost. A MC firms demand curve is not flat but is downward sloping. Thus in the long run the demand curve will be tangent to the long run average cost curve at a point to the left of its minimum. The resul t is excess capacity. dapple monopolistically competitive firms are uneffective, it is usually the case that the costs of regulating prices for both product that is sold in monopolistic competition far exceed the benefits of such regulation.The government would have to regulate all firms that sold heterogeneous productsan hopeless proposition in amarket economy. A monopolistically competitive firm might be tell to be marginally in efficacious because the firm produces at an output where average total cost is not a minimum. A monopolistically competitive market might be said to be a marginally inefficient market structure because marginal cost is less than price in the long run. Another matter to of critics of monopolistic competition is that it fostersadvertisingand the creation ofbrand names.Critics argue that advertising induces customers into using up more on products because of the name associated with them rather than because of rational factors. Defenders of advertising battle this, arguing that brand names can represent a reassure of quality and that advertising helps reduce the cost to consumers of weighing the tradeoffs of numerous competing brands. There are unique information and information processing costs associated with recogniseing a brand in a monopolistically competitive environment. In a monopoly market, the consumer is face with a single brand, making information gathering relatively inexpensive.In a perfectly competitive industry, the consumer is faced with many brands, but because the brands are virtually identical information gathering is also relatively inexpensive. In a monopolistically competitive market, the consumer must collect and process information on a large number of different brands to be able to select the best of them. In many cases, the cost of gathering information incumbent to selecting the best brand can exceed the benefit of down the best brand instead of a randomly selected brand.Evidence suggests that consumers use information obtained from advertising not only to assess the single brand advertised, but also to infer the possible existence of brands that the consumer has, heretofore, not observed, as considerably as to infer consumer satisfaction with brands similar to the advertised brand The advantages of monopolistic competition Monopolistic competition can bring the following advantages 1. There are no significantbarriers to entry therefore markets are relativelycontestable. 2. Differentiation creates diversity, choice and usefulness.For example, a typical high street in any town will have a number of different restaurants from which to choose. 3. The market is more efficient than monopoly but less efficient than perfect competition less allocatively and less productively efficient. However, they may be dynamically efficient, innovative in terms of new-made production processes or new products. For example, retailers often constantly have to develop new ways to puff and retain local custom. The disadvantages of monopolistic competitionThere are several potential disadvantages associated with monopolistic competition, including 1. Some differentiation does not create utility but generates unnecessary waste, such as excess packaging. announce may also be considered wasteful, though most is informative rather than persuasive. 2. As the diagram illustrates, assuming profit maximisation, there is allocative inefficiency in some(prenominal) the long and short run. This isbecause price is above marginal cost in both cases. In the long run the firm is less allocatively inefficient, but it is lock up inefficient. . There is a tendency for excess capacity because firms can neer fully exploit their fixed factors because mass production is difficult. This means they areproductively inefficientin both the long and short run. However, this is may be outweighed by the advantages of diversity and choice. As an economic model of competition, monopolistic compe tition is more realistic than perfect competition many acquainted(predicate) and commonplace markets have many of the characteristics of this model. Conclusion Our study gives us an chance to come to the following conclusion.Monopolistic competition is amarket structurein which several or manysellerseach produce similar, butslightlydifferentiatedproducts. Each producercan set itspriceand quantity without affecting the marketplace as a whole. Monopolistic competition differs from perfect competition in that production does not take place at the lowest possible cost. Because of this, firms are left with excess production capacity. It is a type of competition within an industry where * all in all firms produce similar yet not perfectly substitutable products. all(prenominal) firms are able to enter the industry if the profits are attractive. * all firms are profit maximizers. * All firms have some market power, which means none are price takers. Monopolistic competition has cert ain features, one of which is that there are large number of sellers producing differentiated products. So, competition among them is very keen. Since number of sellers is large, each seller produces a very small part of market supply. So no seller is in a position to authority price of product. Every firm is limited in its size.Product differentiation is one of the most important features of monopolistic competition. In perfect competition, products are homogeneous in nature. On the contrary, here, every producer tries to suffer his product dissimilar than his rivals product in order to maintain his separate identity. This boosts up the competition in market. So, every firm acquires some monopoly power. The feature of freedom of entry and exit leads to stiff competition in market. impoverished entry into the market enables new firms to come with close substitutes.Free entry or exit maintains normal profit in the market for a longitudinal span of time. Selling cost is another un ique feature of monopolistic competition. In such type of market, due to product differentiation, every firm has to incur some additional expenditure in the form of selling cost. This cost includes sales promotion expenses, advertisement expenses, salaries of marketing staff, etc. And the last feature of monopolistic competition is that a firm is confront downward sloping demand curve i. e. elastic demand curve.It means one can sell more at lower price and vice versa. BIBLIOGRAPHY 1. Ayers R. and Collinge R. , Microeconomics, Pearson, 2003 2. J. Gans, S. King, N. Gregory Mankiw, Principles of Economics, Thomson Learning, 2003 3. Hirschey, M, Managerial Economics Rev. Ed, Dryden, 2000 4. http//www. britannica. com/EBchecked/topic/390037/monopolistic-competition 5. http//www. investopedia. com/terms/m/monopolisticmarket. asp 6. http//kalyan-city. blogspot. com/2010/11/monopolistic-competition-meaning. htmlMonopolistic CompetitionINTRODUCTION Pure monopoly and perfect competition are two extreme cases of market structure. In reality, there are markets having large number of producers competing with each other in order to sell their product in the market. Thus, there is monopoly on the one hand and perfect competition, on the other hand. Such a mixture of monopoly and perfect competition is called monopolistic competition. It is a case of imperfect competition. The model of monopolistic competition describes a commonmarket structurein which firms have many competitors, but each one sells a slightly different product.Monopolistic competition as a market structure was first identified in the 1930s by American economistEdward Chamberlin, and English economistJoan Robinson. Many small businesses operate under conditions of monopolistic competition, including independently owned and operated high-street stores and restaurants. In the case of restaurants, each one offers something different and possesses an element of uniqueness, but all are essentially competing for the same customers. The aim of the given work is the study of monopolistic competition. The paper consists of introduction, body, conclusion and bibliography.In the introduction the aim of the work is defined and the structure of the paper is described. The body gives the definition of monopolistic competition, studies it main characteristics and comments on the main advantages and disadvantages of monopolistic competition. Conclusion sums up the results of the study. Bibliography comprises the list of references used when carrying out the work. MONOPOLISTIC COMPETITION Monopolistic competitionis a type ofimperfect competitionsuch that competing producers sell products that aredifferentiatedfrom one another as good but not perfectsubstitutes, such as from branding, quality, or location.In monopolistic competition, a firm takes the prices charged by its rivals as given and ignores the impact of its own prices on the prices of other firms. In a monopolistically competitive market, fir ms can behave likemonopoliesin theshort run, including by using market power to generate profit. In thelong run, however, other firms enter the market and the benefits of differentiation decrease with competition the market becomes more like aperfectly competitiveone where firms cannot gain economic profit.In practice, however, if consumer rationality/innovativeness is low and heuristics are preferred,monopolistic competitioncan fall intonatural monopoly, even in the complete absence of government intervention. In the presence of coercive government, monopolistic competition will fall intogovernment-granted monopoly. Unlike perfect competition, the firm maintains unornamented capacity. Models of monopolistic competition are often used to model industries. Examples of industries with market structures similar to monopolistic competition includerestaurants,cereal,clothing,shoes, and service industries in large cities.The founding father of the theory of monopolistic competition isEdw ard Hastings Chamberlin, who wrote a pioneering book on the subjectTheory of Monopolistic Competition(1933). Joan Robinsonpublished a bookThe Economics of Imperfect Competitionwith a comparable theme of distinguishing perfect from imperfect competition. Monopolistically competitive markets have the following characteristics * There are many producers and many consumers in the market, and no business has total control over the market price. * Consumers perceive that there are non-price differences among the competitors products. There are fewbarriers to entryand exit. * Producers have a degree of control over price. The long-run characteristics of a monopolistically competitive market are almost the same as a perfectly competitive market. Two differences between the two are that monopolistic competition produces heterogeneous products and that monopolistic competition involves a great deal of non-price competition, which is based on subtle product differentiation. A firm making profi ts in the short run will nonetheless onlybreak evenin the long run because demand will decrease and average total cost will increase.This means in the long run, a monopolistically competitive firm will make zeroeconomic profit. This illustrates the amount of influence the firm has over the market because of brand loyalty, it can raise its prices without losing all of its customers. This means that an individual firms demand curve is downward sloping, in contrast to perfect competition, which has aperfectly elasticdemand schedule. Monopolistically competitive markets exhibit the following characteristics 1. Each firm makes independent decisions about price and output, based on its product, its market, and itscosts of production. . Knowledge is widely spread between participants, but it is unlikely to be perfect. For example, diners can review all the menus available from restaurants in a town, before they make their choice. Once inside the restaurant, they can view the menu again, be fore ordering. However, they cannot fully appreciate the restaurant or the meal until after they have dined. 3. Theentrepreneurhas a more significant role than in firms that are perfectly competitive because of the increased risks associated with decision making. 4.There is freedom to enter or leave the market, as there are no majorbarriers to entryor exit. 5. A central feature of monopolistic competition is that products are differentiated. There are four main types of differentiation a. Physical product differentiation, where firms use size, design, colour, shape, performance, and features to make their products different. For example, consumer electronics can easily be physically differentiated. b. Marketing differentiation, where firms try to differentiate their product by distinctive packaging and other promotional techniques.For example, breakfast cereals can easily be differentiated through packaging. c. Human capital differentiation, where the firm creates differences throug h the skill of its employees, the level of training received, distinctive uniforms, and so on. d. Differentiation through distribution, including distribution via mail order or through internet shopping, such as Amazon. com, which differentiates itself from traditional bookstores by selling online. 6. Firms areprice makersand are faced with a downward slopingdemand curve.Because each firm makes a unique product, it can charge a higher or lower price than its rivals. The firm can set its own price and does not have to take it from the industry as a whole, though the industry price may be a guideline, or becomes a constraint. This also means that the demand curve will slope downwards. 7. Firmsoperating under monopolistic competition usuallyhave to engage in advertising. Firms are often in fierce competition with other (local) firms offering a similar product or service, and may need to advertise on a local basis, to let customers know their differences.Common methods of advertising fo r these firms are through local press and radio, local cinema, posters, leaflets and special promotions. 8. Monopolistically competitive firms are assumed to beprofit maximisersbecause firms tend to be small with entrepreneurs actively involved in managing the business. 9. There are usually a large numbers of independent firms competing in the market. Product differentiation Monopolistic competition firms sell products that have real or perceived non-price differences. However, the differences are not so great as to eliminate other goods as substitutes.Technically, the cross price elasticity of demand between goods in such a market is positive. In fact, the XED would be high. Monopolistic competition goods are best described as close but imperfect substitutes. The goods perform the same basic functions but have differences in qualities such as type, style, quality, reputation, appearance, and location that tend to distinguish them from each other. For example, the basic function of motor vehicles is basically the same to move people and objects from point A to B in reasonable comfort and safety.Yet there are many different types of motor vehicles such as motor scooters, motor cycles, trucks, cars and SUVs and many variations even within these categories. There are many firms in each monopolistic competition product group and many firms on the side lines prepared to enter the market. A product group is a collection of similar products. The fact that there are many firms gives each MC firm the freedom to set prices without engaging in strategic decision making regarding the prices of other firms and each firms actions have a negligible impact on the market.For example, a firm could cut prices and increase sales without fear that its actions will prompt retaliatory responses from competitors. How many firms will an MC market structure support at market equilibrium? The answer depends on factors such as fixed costs, economies of scale and the degree of product di fferentiation. For example, the higher the fixed costs, the fewer firms the market will support. Also the greater the degree of product differentiation the more the firm can separate itself from the pack the fewer firms there will be at market equilibrium.In the long run there is free entry and exit. There are numerous firms waiting to enter the market each with its own unique product or in pursuit of positive profits and any firm unable to cover its costs can leave the market without incurring liquidation costs. This assumption implies that there are low start up costs, no sunk costs and no exit costs. The cost of entering and exit is very low. Each monopolistic competition firm independently sets the terms of exchange for its product. The firm gives no consideration to what effect its decision may have on competitors.The theory is that any action will have such a negligible effect on the overall market demand that an MC firm can act without fear of prompting heightened competiti on. In other words each firm feels free to set prices as if it were a monopoly rather than an oligopoly. Monopolistic competition firms have some degree of market power. Market power means that the firm has control over the terms and conditions of exchange. An MC firm can raise it prices without losing all its customers. The firm can also lower prices without triggering a potentially ruinous price war with competitors.The source of an MC firms market power is not barriers to entry since they are low. Rather, an MC firm has market power because it has relatively few competitors, those competitors do not engage in strategic decision making and the firms sells differentiated product. Market power also means that an MC firm faces a downward sloping demand curve. The demand curve is highly elastic although not flat. There are two sources of inefficiency in the MC market structure. First, at its optimum output the firm charges a price that exceeds marginal costs, the MC firm maximizes pro fits where MR = MC.Since the MC firms demand curve is downward sloping this means that the firm will be charging a price that exceeds marginal costs. The monopoly power possessed by an MC firm means that at its profit maximizing level of production there will be a net loss of consumer (and producer) surplus. The second source of inefficiency is the fact that MC firms operate with excess capacity. That is, the MC firms profit maximizing output is less than the output associated with minimum average cost. Both a PC and MC firm will operate at a point where demand or price equals average cost.For a PC firm this equilibrium condition occurs where the perfectly elastic demand curve equals minimum average cost. A MC firms demand curve is not flat but is downward sloping. Thus in the long run the demand curve will be tangent to the long run average cost curve at a point to the left of its minimum. The result is excess capacity. While monopolistically competitive firms are inefficient, it i s usually the case that the costs of regulating prices for every product that is sold in monopolistic competition far exceed the benefits of such regulation.The government would have to regulate all firms that sold heterogeneous productsan impossible proposition in amarket economy. A monopolistically competitive firm might be said to be marginally inefficient because the firm produces at an output where average total cost is not a minimum. A monopolistically competitive market might be said to be a marginally inefficient market structure because marginal cost is less than price in the long run. Another concern of critics of monopolistic competition is that it fostersadvertisingand the creation ofbrand names.Critics argue that advertising induces customers into spending more on products because of the name associated with them rather than because of rational factors. Defenders of advertising dispute this, arguing that brand names can represent a guarantee of quality and that advertis ing helps reduce the cost to consumers of weighing the tradeoffs of numerous competing brands. There are unique information and information processing costs associated with selecting a brand in a monopolistically competitive environment. In a monopoly market, the consumer is faced with a single brand, making information gathering relatively inexpensive.In a perfectly competitive industry, the consumer is faced with many brands, but because the brands are virtually identical information gathering is also relatively inexpensive. In a monopolistically competitive market, the consumer must collect and process information on a large number of different brands to be able to select the best of them. In many cases, the cost of gathering information necessary to selecting the best brand can exceed the benefit of consuming the best brand instead of a randomly selected brand.Evidence suggests that consumers use information obtained from advertising not only to assess the single brand advertise d, but also to infer the possible existence of brands that the consumer has, heretofore, not observed, as well as to infer consumer satisfaction with brands similar to the advertised brand The advantages of monopolistic competition Monopolistic competition can bring the following advantages 1. There are no significantbarriers to entry therefore markets are relativelycontestable. 2. Differentiation creates diversity, choice and utility.For example, a typical high street in any town will have a number of different restaurants from which to choose. 3. The market is more efficient than monopoly but less efficient than perfect competition less allocatively and less productively efficient. However, they may be dynamically efficient, innovative in terms of new production processes or new products. For example, retailers often constantly have to develop new ways to attract and retain local custom. The disadvantages of monopolistic competitionThere are several potential disadvantages associ ated with monopolistic competition, including 1. Some differentiation does not create utility but generates unnecessary waste, such as excess packaging. Advertising may also be considered wasteful, though most is informative rather than persuasive. 2. As the diagram illustrates, assuming profit maximisation, there is allocative inefficiency in both the long and short run. This isbecause price is above marginal cost in both cases. In the long run the firm is less allocatively inefficient, but it is still inefficient. . There is a tendency for excess capacity because firms can never fully exploit their fixed factors because mass production is difficult. This means they areproductively inefficientin both the long and short run. However, this is may be outweighed by the advantages of diversity and choice. As an economic model of competition, monopolistic competition is more realistic than perfect competition many familiar and commonplace markets have many of the characteristics of this model. Conclusion Our study gives us an opportunity to come to the following conclusion.Monopolistic competition is amarket structurein which several or manysellerseach produce similar, butslightlydifferentiatedproducts. Each producercan set itspriceand quantity without affecting the marketplace as a whole. Monopolistic competition differs from perfect competition in that production does not take place at the lowest possible cost. Because of this, firms are left with excess production capacity. It is a type of competition within an industry where * All firms produce similar yet not perfectly substitutable products. All firms are able to enter the industry if the profits are attractive. * All firms are profit maximizers. * All firms have some market power, which means none are price takers. Monopolistic competition has certain features, one of which is that there are large number of sellers producing differentiated products. So, competition among them is very keen. Since number of s ellers is large, each seller produces a very small part of market supply. So no seller is in a position to control price of product. Every firm is limited in its size.Product differentiation is one of the most important features of monopolistic competition. In perfect competition, products are homogeneous in nature. On the contrary, here, every producer tries to keep his product dissimilar than his rivals product in order to maintain his separate identity. This boosts up the competition in market. So, every firm acquires some monopoly power. The feature of freedom of entry and exit leads to stiff competition in market. Free entry into the market enables new firms to come with close substitutes.Free entry or exit maintains normal profit in the market for a longer span of time. Selling cost is another unique feature of monopolistic competition. In such type of market, due to product differentiation, every firm has to incur some additional expenditure in the form of selling cost. This cost includes sales promotion expenses, advertisement expenses, salaries of marketing staff, etc. And the last feature of monopolistic competition is that a firm is facing downward sloping demand curve i. e. elastic demand curve.It means one can sell more at lower price and vice versa. BIBLIOGRAPHY 1. Ayers R. and Collinge R. , Microeconomics, Pearson, 2003 2. J. Gans, S. King, N. Gregory Mankiw, Principles of Economics, Thomson Learning, 2003 3. Hirschey, M, Managerial Economics Rev. Ed, Dryden, 2000 4. http//www. britannica. com/EBchecked/topic/390037/monopolistic-competition 5. http//www. investopedia. com/terms/m/monopolisticmarket. asp 6. http//kalyan-city. blogspot. com/2010/11/monopolistic-competition-meaning. html