Monopolistic Competition: 8 Main Characteristics / Causes
Monopolistic competition is identified in an industry/market where many 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.
Characteristics (Causes / Features) of Monopolistic Competition Market
Following are the Characteristics (Causes / Features) of a Monopolistic Market,
1. Products are Highly Similar, Highly Substitutable, But Not Identical
Firms that operate in a monopolistic competition market have very similar and highly substitutable products but are not identical.
Example: The shoe industry is a good example of monopolistic competition. There are many types of shoes with slightly different styles and quality levels. All these products are highly similar, highly substitutable, but not identical.
2. The Market Power of Individual Firm is Very Low (None)
An individual firm is not capable to have any significant market power. The individual firm has very low or no market power.
Example: The soap industry is classified as monopolistic competition. The market power of a single soap production firm is very low. One firm can not make any significant influence over the industry output and price.
3. A Large Number of Producers (Sellers)
There are large numbers of firms in a monopolistic competition market. Unlike monopoly or oligopoly markets, consumers have a vast variety of choices in monopolistic competition.
Example: As an example, take the clothing retail industry in the united states. There are many clothing retailers including TJX, Nike, Gap, Nordstrom, Ross Stores, Timberland, and Calvin Klein. There are many companies in the market and customers have a variety of options to choose from.
4. Barriers to Entry & Exit Are Low
New entrants can enter easily as the barriers to entry is very low. The initial investment, regulatory terms, patent restrictions, and risk factors are very low. Many new corporates can and willing to compete in the market.
Example: The soap industry is a classical example. This is an industry with a monopolistic competition where many competitors are available and entry barriers are low. Anyone can start soap manufacturing without having high barriers to entry.
5. Competition is High
Since there are very less barriers to entry, the monopolistic competition market has many rivels. The industry competition is high. This makes one or a couple of firms take entire control of the market.
Example: Hair salon is a business that is a classic example of monopolistic competition. According to ibisworld.com there are 904,718 Hair Salon Businesses in the US in 2022.
6. Less Possibility for Economies of Scale
It is hard for a firm to achieve economies of scale due to the competition. But if few firms merge then it is possible to reach economies of scale.
The firm can benefit from cost advantages when reaching economies of scale. There is an optimum production output level where the firm can produce with the minimum marginal cost.
7. The Individual Firm Cannot Influence the Market Output or Price
An individual firm can not influence the output or price of the market. The output and price depend on the market as a whole, not on individual firms or groups of firms.
Example: The clothing retail market is a monopolistic competition. One clothing retailer can not influence the market to control the price or output.
8. Supernormal Profits in the Short Term and Then Normal Profits in the Long Term
There is a certain possibility for a firm in monopolistic competition to make supernormal profits if they can fulfill a niche gap in the market. As an example, in the mobile phone production industry, if one company may create a new product with a unique design and technology, the firm will benefit from a supernormal profit.
But sooner the competitors will also produce similar mobile devices so that in the long term, the supernormal profit will be converted into normal profit.
- Overview, Definition, & Features of Monopolistic Competition
- Real Examples of Monopolistic Competition (in USA, Canada, World)
- Advantages and Disadvantages of Monopolistic Competition
- Definition, Examples, and Characteristics of Monopoly Market
- Real Examples of Monopoly Market (in the USA, Canada, Australia, World)
- Important Characteristics / Causes of Monopoly Market
- Advantages and Disadvantages of Monopoly Market
- Definition, Types, and Characteristics of Oligopoly Market
- Real Examples of Oligopoly Market (in the USA, Canada, World)
- Seven Important Characteristics of Oligopoly Market
- Advantages and Disadvantages of Oligopoly Market