Monopolistic competition occurs when the related products or services may seem similar but are not perfect substitutes (Overby et al., 2021). It exists between perfect and monopoly competition by combining their elements, including similar services or products that are not identical. Some products and services of monopolistic competition include clothes, household items, hair salons, hamburgers and soap. They are items that are sold and marketed by different competitive companies. Many sellers in monopolistic completion tend to act independently, whereby they are large in numbers.
An example of a monopolistic competition firm today is restaurants such as Mcdonalds’ and Burger King. They are both fast food chains with a similar market base and offer comparable services and products. Both Burger King and McDonald’s are fast food chains that are actively competing with one another. The only recognition of these products is that they are differentiated through the price, providing different drinks and foods in packages and brand recognition.
Consent in this type of competition is not standard or probably possible since every seller acts independently from the other, and their product and services are almost similar. In monopolistic competition, some sellers always use pricing as the key strategy by opting to lower the price and sacrificing a higher profit margin to make higher sales. In contrast, others may raise their price and use marketing and packaging to highlight how their product is of better quality. The goods and services all serve the same purpose, and sellers use individual branding and marketing strategy to differentiate their interests.
Monopolistic competition is associated with a considerable number of characteristics. Firstly monopolistic competition has low barriers to entry. Monopolistic competition creates an environment favorable for all organizations, and one firm does not monopolize the market: multiple companies can enter the market and favorably compete for the market base. The decisions of other competitors do not influence firms; hence all firms function without the fear of competition. In addition, monopolistic competition is associated with product differentiation. Production differentiation is where the competing companies in a market differentiate similar products through factors such as different brand names, different marketing strategies and different levels of quality for the product.
Firms in a monopolistic competition set the prices for the goods and services they specialize in. The fluctuations of the costs are done harmoniously without the creation of wars, unlike oligopoly, where price fluctuations cause a variety of battles. Nevertheless, monopolistic competition is involved with demand elasticity. Demand is highly flexible due to the instability in the prices of goods and services. For instance, consumers change their purchasing decisions (from one brand name to another) due to price changes for products such as laundry detergents.
Monopolistic competition can perform in both the short-term and long term. Firms within monopolistic competition aim to produce several products and services where the marginal revenue matches the marginal cost (McCalman, 2022). This is significant in maximizing profits and lowering losses. When the existing firms make huge profits, the new firms tend to enter the market. When there are shifts in the demand and marginal revenue curves, the number of new firms entering the market goes to zero. This indicates that new firms stop entering the market since the existing firms are not making profits. In situations where the existing firms are making losses, there is a high rate of firms from the market. A limited number of monopolistic competition firms are left in the market, and they are not making any gains or losses or gains at the moment. This means that the market has attained equilibrium in the long run when there are no entries or exits from the market. And when all the firms make zero gains.
Pros and Cons of Monopolistic Competition
i. Pros
Monopolistic competition has a considerable number of advantages that make individuals prefer it compared to other competitive structures such as oligopoly, monopoly and perfect competition in the market. Firstly, monopolistic competition has few to no significant market entry barriers. New firms interested in joining the market have a limited number of requirements they should meet before starting to operate (Muchiri et al., 2020). Firms under monopolistic competition, such as bakeries and restaurants, can diversify their products through differentiation. Therefore consumers enjoy the freedom of choice and utility of the products. Consistent advertisement creates awareness and thus informs consumers about the goods and services available in the market. Nevertheless, the market base for monopolistic competition is more effective than a monopoly in production and allocation, although less effective than perfect competition.
ii. Cons
Firms that operate under monopolistic competition are susceptible to a considerable number of challenges. Ineffectiveness in the allocation of both short-term and long-term markets. This is attributed to the changes in the price of products where the price is above the cost in both short and long-term market allocation. In long-term cases, the company tends to be less inefficient in allocation but still needs to be more effective. Some differentiation activities do not guarantee utility, resulting in the waste of products, such as in terms of excessive packaging. Other activities, such as continuous advertisement due to rebranding products many times, are considered wasteful (Bertoletti & Etro, 2021). Moreover, lack of standardized goods and ineffective allocation of resources are problems associated with monopolistic competition.
Bible reflection on monopolistic competition
However, competition is built in the social system and Western economy, and the bible and Christianity are conflicted on whether God loves competition or wants Christians to avoid it. The answer is more complex. It’s, in fact, everyday work, but is it godly to compete or should Christians do their best to eliminate or reduce competition? It is hard to succeed in monopolistic competition, and sellers may be tempted to seek their advantages at the expense of others. For example, “Then I observed that most people are motivated to succeed because they envy their neighbors. But this, too, is meaningless–like chasing the wind. “Fools fold their idle hands, leading them to ruin.” And yet, “Better to have one handful with quietness than two handfuls with hard work and chasing the wind.” (King James Bible, 2008, Ecclesiastes 4:4-6)
However, at the same time, the competition is beneficial. For instance, most companies have improved their services and goods like mobile phones and airline prices because of the competition in the sector. Monopolistic competition is made up of pressure that may encourage excellence, accountability to consumers, and value creation and may also be dangerous by causing the temptation to disrupt the competitor’s work or deceive customers. But it still creates jobs and wealth and cultivates hope and fear.
Opinion on whether competitive monopoly is overall favorable or unfavorable
This competitive structure, monopolistic competition, could be more efficient and is associated with many problems that need improvement. Monopolistic competition is an imperfect competition that is regarded as inefficient. This is due to various factors such as excess capacity, fluctuating selling prices, the need for more specialization in services and products provided, and unemployment. There is no worth that firms have to engage in a market system with such characteristics that negatively influence them. For instance, the continuous fluctuations of product prices and the rebranding of products cause intensified use of vast amounts of money in advertising. These activities could be more suitable for running businesses since they heighten the prices of products and services hence a company losing both customers and leads.
Furthermore, monopolistic competition is ineffective because it concerns multiple firms that must fully utilize their resources. Even though the firms have a large production capacity, they fail to fully and effectively use it, thus the intensified levels of unemployment. Changes in the number of existing and new firms in the market accompany monopolistic competition. Firms must be assured of consistency in the market and progressive profit-making. This is attributed to factors that work towards maintaining an equilibrium of the market.
Nonetheless, mass production is a complex process. It is irrefutable that monopolistic competition is unfavorable since corporates experience the inability to fully exploit fixed factors, resulting in companies highlighting excess capacity. For both short-term and long-term functioning, companies within monopolistic competition could be more efficient in production and allocation (Ela-Medja & Alberca, 2023).
References
Bertoletti, P., & Etro, F. (2021). Monopolistic competition with generalized additively separable preferences. Oxford Economic Papers, 73(2), 927-952.
Ela-Medja, T. O., & Alberca, P. (2023). Efficiency and Competitiveness of the Equatorial Guinean Financial Sector. Mathematics, 11(1), 241.
King James Bible. (2008). Oxford University Press. (Original work published 1769)
McCalman, P. (2022). Trade policy with FANG’s (aka trade policy and multi-sided platforms)—Journal of International Economics, 138, 103655.
Muchiri, S., Paraschiv, M., & Wooten, J. (2020). Teaching Economics with Breaking Bad. Available at SSRN 3525829.
Øverby, H., Audestad, J. A., Øverby, H., & Audestad, J. A. (2021). Digital Monopolies and Oligopolies. Introduction to Digital Economics: Foundations, Business Models and Case Studies, 193-206.
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