In this article we will consider such a market structure when a large number of sellers function on it, selling rather close products, but not perfect substitutes for each other, in other words, the market of monopolistic competition. In this market, each manufacturer, on the one hand, is a monopolist, as he offers his own version of the product, but he has competitors who sell similar products, but with some excellent characteristics.
The foundations of the model and the term “market of monopolistic competition” were developed by Edward Chamberlain in 1933.
Features:
- A significant number of sellers in the market.
- Product differentiation.
- Tough non-price competition.
- Relatively low barriers.
Consider these features in more detail.
A large number of manufacturers
Like perfect competition, monopoly competition is characterized by a fairly large number of individual sellers. Each company has only a small market share in the industry. As a result, such a company is characterized by small size. On the one hand, this feature excludes the possibility of coordinating actions and conspiracy to increase the price of a product or limit output. On the other hand, small firms will not be able to influence the price level.
Product differentiation
This characteristic is key for this market structure , since it assumes the presence of sellers offering very close, but not similar products with similar characteristics. Such products are not perfect substitutes for each other.
Grounds for differentiation:
- Physical characteristics of the product.
- The location.
- Imaginary differences associated with the brand, packaging, advertising, image of the company.
Differentiation can also be vertical and horizontal. Vertical differentiation involves dividing goods by quality into “good” and “bad”, for example, the choice between the Temp and Samsung TVs. Horizontal differentiation involves the division of goods at approximately the same prices into those that correspond to consumer preferences and do not correspond. For example, cars of the BMW and Audi brands.
Product differentiation provides firms with a limited opportunity to influence the market price, as many buyers are likely to remain committed to a particular brand with a slight increase in the cost of production. But the market of monopolistic competition implies only the very limited influence of an individual firm. Demand cross-elasticity is quite high.
Market entry barriers
Entry into the industry is not difficult for firms. This is due to small initial investments, small economies of scale, and the small size of existing firms. However, entering the market of monopolistic competition is still more difficult than in conditions of perfect competition, since the new company will have to find a way to attract buyers of existing firms. And this will require additional costs from the seller.
Non-price competition
The market of monopolistic competition allows firms to use two main strategies for non-price impact on sales:
- Strengthen differentiation.
- Change the strategy of advertising and sales promotion.
Thus, monopolistic competition is the most realistic model for many industries, including retail, the car market, household appliances, cosmetics and hairdressing services and so on. With regard to material goods, it is worth noting that the wholesale market for goods such as soap and toothpaste is oligopolistic, since it is not characterized by multiplicity, freedom of entry and small size, and the retail market is also an example of monopolistic competition.