Monopolistic Competition: Advantages and Disadvantages

by Rusith

In a monopolistic competition market, firms offer products or services that are highly similar, highly substitutable, but not identical. A monopolistic competition market consists of a large number of producers/sellers. High competition is available because the barriers to entry and exit are low.

Advantages (Pros / Positives / Benefits) of Monopolistic Competition

1. Few Barriers to Entry

Markets experiencing monopolistic competition has fewer barriers to entry. The advantage is with both consumer point of view and industry as a whole. There will be new rivalries in the market which brings a healthy situation for the industry. Also, consumers will not stagnate to few products since there are more producers available.

2. Differentiated Products and Services

Consumers will get the freedom to experience different products and services in the monopolistic competition market. When compared with a monopoly market, the number of products is high in the monopolistic competition market.

3. Uplift Innovation of the Industry

Since there is much competition in the market, firms try to do innovative things and uplift their product/service offering. This is a healthy situation for the industry as innovation will drive the industry to success.

4. A Large Number of Sellers / Producers

Since barriers to entry are low, there will be many sellers/producers who will join the market continuously. This is a very positive factor for the consumers and the industry as a whole.

5. Consumer Has More Information

Usually, there is a high level of advertising in monopolistic competition firms. This provides a greater advantage for the consumers with information and hence, lowers search costs. This results in more informed consumers.

6. Active Business Environment

Monopolistic competition results in an active business environment. There is good competition, since or group can not dominate in the market, market share is shared between many firms. These will result in many benefits for the industry.

7. Low Price High-Quality Products

Since with the competition, firms have to lower their profit margin and provide consumers low price competitive products. Otherwise, the market share will be loosened. Also, firms have less chance to compromise the quality since consumers can move from one brand to another easily.

Disadvantages (Cons / Negatives / Drawbacks / Risks) of Monopolistic Competition

1. Less Production Efficiency of Individual Firms

Monopolistic competition market disallows monopoly to be in place. There are many competitors in the market. This results in difficulty for the companies to achieve economies of scale. A company can not reach the optimum production efficiency capability due to the unavailability of economies of scale.

2. Advertising Focus More Than Product Quality

Companies focus on advertising and promotional activities to set a particular product or service as superior to competitors. The focus shifts from product improvement to advertisements. This is a disadvantage from the consumer’s point of view.

3. More Product Alternatives for Consumers

Consumers will be dissatisfied because there are many product alternatives available for them. There will be many similar products in the market and customers will be misled to choose the correct according to the expected quality.

4. Predatory Pricing

Firms that have a large investment potential can set the prices low to attempt to drive out competitors and create a monopoly. Competitors will not be able to hold if a firm set the prices low for a consecutive duration. This is known as predatory pricing.

5. Misleading Advertising

Since with the competition and substitutable products, firms will try to invest more and more in advertising. Some advertisements will be false and misleading, uplifting the product quality more than what it is, which is not a good situation from a consumer’s point of view.

6. Excess Resource Waste

Many firms compete in the market to produce similar products, using the same resources. But with the difficulty to reach economies of scale, neither firm will hit the optimum production optimization level. This will increase the resource waste in the industry as a whole.

7. Lack of Standardized Products

Since many firms pump investment into advertisements to increase sales, firms will not focus on product quality. This will bring up the question of whether firms will produce standardized products.

Market Structures

Overview, Features, and Types of Market Structures

Monopolistic Competition

Oligopoly Market

Monopoly Market

Perfect Competition