User:Jayasreev/Temp/Introduction M.C.1.doc

Introduction.

I hope all of you are familiar with Perfect Competition and Monopoly market structures. But if I ask you, to identify market forms that your mother or you are visiting everyday such as vegetable market or grocery market, then you will be finding it difficult to identify that markets under perfect competition and monopoly’ s real examples. Why because these market structures are not existing in the real world. Monopolistic competition has been introduced by American economist Prof. Edward Chamberlin, in his book 'Theory of Monopolistic Competition' published in 1933.

Perfect Competition is the market structure where there are millions of buyers and sellers and product are homogeneous or same.

Pure Monopoly is the market where single seller is controlling entire supply and many buyers are existing to buy that product.

But these two are imaginary market structures which are developed for building base of economic theory. Perfect competition and monopoly are polar opposite market forms.

But these two are imaginary market structures which are developed for building base of economic theory. Perfect competition and monopoly are polar opposite market forms.

Mr .Chamberlin and Mrs.Joan Robinson are two economists who popularised the concept of Monopolistic Competition. This market structure is the most realistic market in the world.

Which bathing soap are you using? Lux, Hamam, Sandur, Pears, Why you prefer only LUX? That answers are clear at the end of this lesson.

LEARNING OBJECTIVES.

• You should understand the clear difference between perfect competition, monopoly and monopolistic competition.
• Distinguishing features of Monopolistic competition.
• At the end of session, you should be able to identify various market structures that you happen to come across every day.
• Understanding what makes this market more realistic in its nature.

Main Points.

• 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 few barriers of entry and exit.

Features of Monopolistic Competition.

• Large no of sellers and Large no of buyers.
• Differentiated Products.
• Freedom of entry and exit.
• Independent decision making.
• Group
• Imperfect knowledge of market
• Selling cost.

A.Large no of Selllers.

In monopolistic competition[MC], no of sellers are large, But number is not as large as perfect competition. Generally as a thump rule, it is less than 100.

But then how it is different from Perfect Competition and monopoly?

Let us take the case of market for soaps and detergents. This is the classical example of monopolistic competition. Suppose there are 51 soap producers in the market, all of them are not selling homogeneous products, all are selling soaps only, but each product is different as a result every producer is competing with each other, but remember products are not same. This makes this market different from perfect competition. In soap market, some are selling Lux, Hamam, Santoor, Pears, Lifeboy, Dettol etc. so products are not homogeneous.

Since there are many sellers, this market is different from monopoly. But like monopoly, every seller each fix his own price in monopolistic competition. Thus in M.C. each seller is a price maker.

B. Product Differentiation.

This is the most distinct feature of M.C. In this market, all the producers are selling similar, but not the same products. Soaps are available under different brand name, colours, size, smell. Packing etc. For eg, Lux, Hemam, Pears, Dettol, Santoor etc.

Product differentiation give rise to an element of monopoly to each producer under M.C. Thus according to Chamberlin,M.C. is a blend of monopoly and perfect competition.

Friends, I like only Lux because of its special colour, smell or its name. Any other soap cannot substitute Lux for me.

It is clear that products in M.C, are not identical[same] as in Perfect Competition, neither are they are remote substitutes as monopoly. Real qualitative differences between the products may not be very strong in this market, but imaginary differences through colour, packing, brand name are more strong in this market.

Freedom of entry and exit.

This market allows freedom of entry and exit. It means any one can enter the market when they feel like and any one can go out of the market when they feel. There are no barriers of entry as in the monopoly.

Many are waiting in the market to enter with their unique[Special] product so as to attract consumers. At the time, many wants to leave the market so as to reduce the loss. Thus no sunk cost or exit cost in this market.

Independent decision making.

Each firm in M.C. sets its independent policy relating to price and output. Each firm feels free to set its own price and they want to become monopolists and not oligopolists. This is the main element which makes it different from Perfect competition.

The concept of Group.

Mr.Chamberlin has introduced the concept of Group in Monopolistic Competition. This is peculiar to M.C. Generally we use the term industry in Perfect Competition or even in Monopoly.

Group means number of producers who are producing goods which are fairly close substitutes. All are selling similar not the same products. Eg Group of producers who are producing similar soaps but not the same soaps forms a group.

Imperfect Knowledge about the market.

Underlying fact in M.C. is that market knowledge of buyer is limited. This is the advantage for seller. Even seller does not have detailed knowledge about market demand and supply.

Selling Cost:

This is most distinguishing feature of this market. This makes this market more attractive than others. Due to product differentiation, every producer has to incur some additional expenditure in the form of selling cost. According to Chamerlin, it includes:

• Expenditure on advertising and promotional activities.
• Salaries of salesman and commissions.
• Margins, dealer’s discount etc
• Window display and free distribution of samples.

As you are aware, advertisement expenditure is the most important form selling cost.

You may be thinking why Tata salt is spending lakhs of rupees on advertisement when this product is a basic necessary item and less expensive, This because this advertisement has capacity of capturing demand and increasing sales. Through advertisement, each firm tries to convince the buyers that their product is better than their competitor or rival producer.

Thus basic purpose of advertisement is to attract customers attraction and to create an permanent picture in the mind of consumer for their product.

Eg. How a small product like NIRMA[washing powder] became a stiff competitior to SURF—a product of big multinational like Unilever.

Two types of Advertisements are in market :

• Informative advertisement.
• Manipulative
• Informative advertisements are those which gives correct information about the product to customers such as price, quality, specification etc. In modern times it is really difficult to see such advts large in number.

Eg- Laptop, Personal computers , automobiles etc.

• Manipulative Advertisement:- This doesnot give proper information about the product, but tries to change mind set of consumers by way of songs, colours, roadshows etc. Most of our daily use products belongs to this group.

Eg- tooth paste, soaps, electronic goods etc.

Eqlibrium of firm under M.C. in the short run.

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To explain equilibrium of a firm in the short run, you are familiar with the fact that we use four curves in any market.

• Average Revenue[AR]
• Marginal Revenue [MR]
• Average Cost[AC]
• Marginal Cost [MC]

In M.C. Average Revenue and Marginal revenue curves are downloading

just like monopoly.

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The producer knows that by reducing price, he will be able to conquer the market as AR represents Price.

Since products are not homogeneous, it is important to sell additional units[Marginal] at lower costs. As a result MR should be downwardsloping.