(B) Main Features of Monopolistic Competition: Monopolistic competition is a modern form of the market.

A large variety of goods are sold in such a market. Its main features can be stated as follows: ii) Close Substitutes: In case of a monopoly there are no substitutes available. Under monopolistic competition firms produce very close substitutes. Chocolates of one company may serve a similar purpose as that of some other firm. The only difference may be of some variation in the quality of the product. iii) Group: Firms under monopolistic competition together form a group. They cannot be called an industry. This is because their products are somewhat dissimilar and not homogenous as under competitive industry. (v) Selling (Advertising) Cost: Selling Cost (SC) is another outstanding feature of a monopolistic competitive market. This in the form of advertisement expenditure. Selling Cost and Product Differentiation together enable the producer to maintain some control over market conditions and influence the shape of the demand curve. Both features are interdependent. Whenever a product is differentiated it is necessary to inform buyers; and advertisement is the only medium through which buyers can be told about superiority of that product. Selling Cost by itself is apparent product differentiation. When a product does not contain any genuine qualitative difference, buyers can be made to treat a product differently through advertisements. So whenever products are differentiated and advertised, the market becomes a monopolistic competition. These are the hallmarks of this form of market. The presence of selling cost increases the firms cost of production. In order to recover it, firms have to charge a higher price. The net effect of a monopolistic competitive [next page ] market is pricing goods at a

Characteristics of Monopolistic Competition

higher rate. Consumers have to bear this extra expenditure.

Characteristics of Monopolistic Competition

A relatively large number of sellers Differentiated products Easy entry and exit from the industry Relatively Large Number of Sellers:

Small Market Shares: Each firm has a small percentage of the total monopolistic market and thus has only limited control over market price.

No Collusion: A relatively large number of firms will not combine to restrict outputs and set prices. With so many firms, collusion is almost impossible because it is too easy for one firm to cheat and charge the lower price. Independent Action: Each firm is independent and can determine its pricing policy without considering its rivals. eg. A firm could moderately increase its sales by cutting its prices, but that would have no significant effect on its competitors sales. Differentiated Products: Product Attributes: product differentiation may entail physical or qualitative differences in the products themselves. Real differences in functional features, materials, design, and workmanship are the vital aspects of product differentiation. Service: Service and the conditions surrounding the sale of a product are forms of nonprice product differentiation too. Location: Accessibility of stores that sell certain products or placement of products in stores eg. products at eye level would have an advantage over those that are not. Brand Names and Packaging: Brand loyalty and packaging can affect demand. o ie. Apple's iPhone. It's pretty much the same as any other phone. It has touch screen capability, can surf the web, can listen to music, but the apple brand as well as advertising makes it a big hit on the market of cell phones. Some Control over Price: Producers can charge extra for extra features, etc. o Generally, firms are "price makers" since each firm owns such a small percentage of the total market; if a firm changed the pirce of their product, there would not be much of an effect on the market. The firms in monopolistic competition will DIFFERENTIATE their products and make them more appealing to the customers in order to maximize their profits.

Easy Entry and Exit:

In the SHORT RUN, a firm may obtain economic profits or losses. However, since there are little barriers from preventing companies to enter or leave the industry, in the long run, the firms will only obtain normal profits Remember: entry eliminates profits; exit eliminates losses!

Monopolistic Competitive Industries:

Shoes -Nike, Addidas, Reebok Jewelry Asphalt paving Signs Bottled water ice cream-Breyers, Tom & Jerry Mobile Phone- Nokia, Samsung, Sony Ericcson

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 monopolistic competition involves a great deal of non-price competition, which is based on subtle product differentiation. A firm making profits in the short run will nonetheless only break even in 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 zero economic 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 firm's demand curve is downward sloping, in contrast to perfect competition, which has a perfectly elastic demand schedule.

Major characteristics
There are six characteristics of monopolistic competition (MC):

Product differentiation Many firms Free entry and exit in the long run Independent decision making Market Power Buyers and Sellers have perfect information[5][6].

Independent decision making

Each MC firm independently sets the terms of exchange for its product.[10] The firm gives no consideration to what effect its decision may have on competitors.[11] 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 competition. In other words each firm feels free to set prices as if it were a monopoly rather than an oligopoly.

Market power
MC 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 firm's 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.[12] Market power also means that an MC firm faces a downward sloping demand curve. The demand curve is highly elastic although not "flat".

Perfect information

Buyers know exactly what goods are being offered, where the goods are being sold, all differentiating characteristics of the goods, the good's price, whether a firm is making a profit and if so how much.[13] Market Structure comparison Numbe Marke Elasticit Product Profit Pricin Excess Efficienc r of t y of differentiati maximizatio g profits y firms power demand on n condition power Perfect Price Perfectly P=MR=MC[ Competitio Infinite None None No Yes[14] 15] taker[15 elastic ] n Highly Monopolist Yes/No Price elastic ic Many Low High[17] (Short/Lon No[19] MR=MC[15] setter[1 (long 5] competition g) [18] run)[16] Relativel Absolute Price Monopoly One High y (across Yes No MR=MC[15] setter[1 5] inelastic industries)

Inefficiency
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 profits where MR = MC. Since the MC firm's 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 firm's 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.[20]