Monopolistic Competition

Monopolistic Competition

Answer 01

What Is Monopolistic About Monopolistic Competition

Monopolistic competition is basically a form of imperfect competition in which many producers sell products that are not perfect substitutes of each other but are differentiated from each other as goods. Initially, the firms in the monopolistic competition ignore the effects of their product's prices on the prices charged by other firms and consider the prices charged by its competitive firms as given (Mankiw & Taylor, 2006).

What is monopolistic about monopolistic competition is the fact that in the beginning, firms can act like monopolies in a given market that is monopolistically competitive, but this situation remains for a short term where the firms are able to utilize the power of the market in order to generate profits. This is because they believe that the differences in their products compared to the products of the rival firms are not based on the pricing strategy but are rather the result of product differentiation, which results in non-price differences. Another factor of the monopolistic competition because of which it can be called monopolistic at start is the fact that producers have control over the prices they charge and are price makers instead of being price takers, which is a characteristic of monopoly that the firms themselves decide the price of the products (Mankiw & Taylor, 2006).

Difference between Perfect Competition and Monopolistic Competition

The characteristics of both the competitions are what that creates a difference in them. The biggest difference in monopolistic and perfect competition is that of products. In monopolistic competition, the products offered by producers are similar but are differentiated in some ways and are classified as being non-homogenous. However, the products are basically similar in monopolistically competition even though they are slightly different, and this is the reason the firms still face a lot of competition depicting that the elasticity of demand is very high. On the other hand, the products offered by producers in a perfect competition are homogenous and are considered as perfect substitutes for one another unlike the products in monopolistic competition (Krugman et. al, 2008).

In a monopolistic competition, many producers and many consumers exist in the market, and no business has total control over the market price, but they do have some control over the price. The demand curve of the monopolistically competitive firms is not perfectly elastic, it is relatively elastic instead. This means that the demand curve is significantly flat but not completely horizontal. There are many producers and consumers in a perfectly competitive market as well, however there is a difference because in the monopolistic market, the numbers of producers and buyers are not infinite and the market is very competitive (Mankiw & Taylor, 2006).

In the short run, the profits made by firms competing in a monopolistically competitive market can exist at any level. It is generally assumed that the profits earned at the start of the business which are at high levels are what that cause new suppliers to be attracted in ...