Monopolistic competition is an imperfect type of competition that many manufacturers sell products that are distinguished from each other (eg by branding or quality) and are therefore not a perfect substitute. In monopolistic competition, a company takes the price charged by its competitors as it is given and ignores the impact of its own price on the price of another company. In the presence of a coercive government, monopolistic competition will fall into the monopoly given by the government. Unlike perfect competition, the company maintains reserve capacity. Monopolistic competition models are often used to model industries. Examples of industrial textbooks with market structures similar to monopolistic competition include restaurants, cereals, clothing, shoes, and service industries in major cities. The "founding father" of the theory of monopolistic competition is Edward Hastings Chamberlin, who wrote a pioneering book on the subject, Theory of Monopolistic Competition (1933). Joan Robinson published a book on The Economic of Imperfect Competition with a comparable theme to distinguish perfectly from imperfect competition.
A competitive monopolistic market has the following characteristics:
- There are many manufacturers and many consumers in the market, and no business has full control over market prices.
- Consumers feel that there is a price difference among competitors' products.
- There are some barriers to entry and exit.
- Manufacturers have a price control level.
The long-term characteristic of a monopolistically competitive market is almost the same as a perfectly competitive market. The two distinctions between the two are that monopolistic competition produces heterogeneous products and that monopolistic competition involves a great deal of non-price competition, based on subtle product differentiation. A company that generates profit in the short run will remain only break even in the long run as demand will decrease and the average total cost will increase. This means that in the long run, a monopolistically competitive company will produce zero economic profit. This illustrates the magnitude of the firm's influence over the market; because of brand loyalty, can raise the price without losing all its customers. This means that the individual firm's demand curve is sloping down, in contrast to perfect competition, which has a perfectly elastic demand schedule.
Video Monopolistic competition
Karakteristik persaingan monopolistik
There are six characteristics of monopolistic competition (MC):
- Product differentiation
- Many companies
- Freedom of Entry and Exit
- Independent decision-making
- Several levels of market power
- Buyers and sellers do not have perfect information (Non-Perfect Information)
Product Differentiation
MC companies sell products that have real or perceived price differences. However, the difference is not so great to eliminate other items as a substitute. Technically, price cross-demand elasticity between the goods in the market is positive. In fact, XED will be high. MC goods are best described as a near but imperfect replacement. Goods perform the same basic functions but have differences in quality such as type, style, quality, reputation, appearance, and location that tend to distinguish them from each other. For example, the basic function of a motor vehicle is the same - to move people and objects from point to point in reasonable comfort and security. However there are many types of motor vehicles such as motor scooters, motorcycles, trucks and cars, and many variations even in this category.
Many companies
There are many companies in each MC product group and many companies on the side line are prepared to enter the market. The product group is a "collection of similar products". The fact that there are "many companies" gives every company MC the freedom to set prices without engaging in strategic decision-making regarding other companies' pricing and any corporate actions have negligible impact on the market. For example, a company can cut prices and increase sales without fear that its actions will drive a retaliatory response from competitors.
How many companies will support the MC market structure in the market balance? The answer depends on factors such as fixed costs, economies of scale and the degree of product differentiation. For example, the higher the fixed cost, the fewer companies that the market will support.
Freedom of Entry and Exit
Like perfect competition, under monopolistic competition too, companies can enter or exit freely. Enterprises will enter when existing companies generate super-normal profits. With the entry of new companies, supply will increase which will reduce the price and hence the existing company will only be left with normal profit. Similarly, if the existing company suffers losses, some marginal companies will come out. This will reduce the supply because the price of which will go up and the existing company will only be left with normal profit.
Independent decision-making
Each MC company independently establishes exchange terms for its products. The company does not consider what the impact of its decisions on competitors. The theory is that any action will have a negligible effect on the overall market demand that the MC company can act without fear of promoting high competition. In other words, every company feels free to set prices as if it were a monopoly rather than an oligopoly.
Market power
MC companies have several levels of market power. Market forces mean that the company has control over terms and conditions of exchange. MC companies can raise their prices without losing all their customers. Companies can also lower prices without triggering a potential price war with competitors. The market power source of MC companies is not an entry barrier because they are low. In contrast, MC companies have market forces because they have relatively few competitors, they are not involved in strategic decision making and firms sell different products. Market forces also mean that MC companies face a downward sloping demand curve. The demand curve is very elastic although not "flat".
Incomplete information
No seller or buyer has full market information, such as market demand or market supply.
Maps Monopolistic competition
Inefficiency
There are two sources of inefficiency in the MC market structure. First, in its optimum output, firms charge prices that exceed marginal costs, MC firms maximize profits where marginal revenue = marginal cost. Since the downward sloping MC demand curve means that the firm will charge a price that exceeds the marginal cost. The monopoly power owned by the MC company means that at the rate of increase in production profit there will be a net loss from the surplus of consumers (and producers). A second source of inefficiency is the fact that MC companies operate with overcapacity. That is, the output maximization of the MC firm's earnings is less than the output associated with the minimum average cost. Both PC and MC companies will operate at the point where demand or price equals the average cost. For PC companies this equilibrium condition occurs where the elastic demand curve is perfectly equal to the minimum average cost. The MC firm's demand curve is not flat but slopes down. Thus in the long run the demand curve will be tangent to the long-run average cost curve at the point on the left of the minimum. The result is overcapacity.
Socially undesirable aspects compared to perfect competition
- Sales costs : Products under monopolistic competition spend large amounts on advertising and publicity. Most of this spending is wasted from a social point of view. Producers can reduce product prices rather than spend money on publicity.
- Capacity Benefit : In imperfect competition, the installed capacity of any large company, but not fully utilized. The total output, therefore, is less than the socially desirable output. Because production capacity is not fully utilized, its resources are idle. Therefore, production under monopolistic competition falls below the level of full capacity.
- Unemployment : Unemployed capacity below the monopolistic competition expense causes unemployment. In particular, unemployed workers lead to poverty and misery in society. If idle capacity is fully employed, unemployment problems can be solved to some extent.
- Cross Transport : Below the shopping of monopolistic competition takes place on cross transportation. If the goods are sold locally, wasteful spending on cross transport can be avoided.
- Lack of Specialization : Under monopolistic competition, there is little room for specialization or standardization. The differentiation of products practiced under this competition leads to wasteful spending. It is said that instead of producing too many similar products, only a few standard products can be produced. This will ensure better allocation of resources and will improve the economic welfare of the community.
- Inefficiency : In perfect competition, inefficient companies are thrown out of the industry. But under the monopolistic competition the inefficient companies continue to survive.
Problems
Companies that are monopolistically competitive are inefficient, usually in terms of the cost of regulating the price for products sold in monopolistic competition beyond the benefits of the regulation.. A monopolistically competitive company can be said to be inefficiently efficient because it produces at an output where the average total cost is not a minimum. A competitive monopolistic market is a productive and inefficient market structure because marginal cost is less than the price in the long term. A monopolistically competitive market is also allocatively inefficient, since the price given is higher than the marginal cost. Product differentiation increases total utility by better fulfilling people's desires rather than homogeneous products in perfectly competitive markets.
Another concern is that monopolistic competition fosters advertising and the creation of brand names. Ads encourage customers to spend more on the product because the name associated with them is not due to a rational factor. The advocates of this advertising dispute, arguing that brand names can represent quality assurance and that advertising helps reduce costs to consumers to weigh trade-offs between competing brands. There is unique information and information processing costs associated with brand selection in a competitive monopolistic environment. In the monopoly market, consumers are faced with a single brand, making information gathering relatively inexpensive. In the perfect competition industry, consumers are faced with many brands, but because they are identical information gathering is also relatively inexpensive. In a competitive monopolistic market, consumers must collect and process information on a large number of different brands in order to be able to choose the best of them. In many cases, the cost of gathering the information necessary to choose the best brand can outweigh the benefits of consuming the best brands rather than the randomly selected brands. The result is confused consumers. Some brands get prestige value and can extract additional price for it.
The evidence suggests that consumers use information derived from advertising not only to assess the advertised single brand but also to infer the possibility of the existence of a brand that consumers have, to date, not observed, and to conclude consumer satisfaction with a brand similar to that advertised. brand.
Example
In many markets, such as toothpaste, soap, air conditioning, smart phones and toilet paper, manufacturers practice product differentiation by changing the physical composition of a product, using special packaging, or simply claiming to have a superior product based on a brand image or advertisement.
See also
Note
External links
- Monopolistic Competition by Elmer G. Wiens
- Video Announcement of Monopoly Competition by Prof. Vinod Kumar on YouTube
Source of the article : Wikipedia
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