MONOPOLISTIC COMPETITION :
It is a form of market in which there are many buyers and sellers of the product, but the product of each seller is different from that of the others.
In other words, there are many sellers, selling a differentiated product.
Thus monopolistic competition is that condition of industrial market in which a particular commodity of one seller creates an idea of difference from that of other sellers in the minds of the consumers.
Monopolistic competition includes the features of monopoly and perfect competition.
Trademark or brand name gives some monopoly power to the firms. At the same time the firms deal in close substitutes which make control over the price difficult, which means they have partial control over the price.
Attributes of monopolistic competition
1. Large numbers of buyers and sellers: There are large number of firms but not as large as under perfect competition. That means each firm can control its price-output policy to some extent. Also, the size of each firm is small. Each firm has a limited share of market.
2. Product differentiation: product differentiation is a distinct feature of monopolistic competition. Differentiation implies that rival firms are selling products which are not perfect substitutes of each other but close substitutes of each other.
3. Selling costs: Another feature of the monopolistic competition is that every firm tries to promote its product by different types of expenditures. Advertisement is the most important constituent of the selling cost which affects demand as well as cost of the product. These costs are incurred by a firm to increase its market share. Once ‘brand loyalty’ is established, the firm enjoys higher and higher control over price.
4. Demand curve in monopolistic competition: The demand curve in monopolistic firm is more elastic this is because of large number of close substitutes. Also, partial control over the price leads to downward sloping demand curve of the firm; quantity sold increases when price is reduced. If price is raised, quantity sold tends to reduce.
(FIRM’S DEMAND CURVE UNDER MONOPOLISTIC COMPETITION)
5. Freedom of entry and exit: Firms are a free to enter the industry or leave it. However, new firms have no absolute freedom of entry into industry. Products of some firms maybe legally patented. New firms cannot produce identical products. Lack of absolute freedom enables the existing firms to earn monopoly profits or extra-normal profits.
6. Non-price competition: Non-price competition refers to the efforts or strategy on the part of a monopolistic competitive firm to increase its sales and profits through product variation and selling expenses instead of a cut in the price of its product. The firms often avoid getting into price-wars. Instead they focus on non price competition.
7. Market power: Barriers to entry and exit in the industry are low, and the decisions of any one firm do not directly affect those of its competitors. All firms have the same, relatively low degree of market power; they all have partial control over the price.
8. Lack of perfect knowledge: The buyers and sellers do not have perfect knowledge of the market. There are innumerable products each being a close substitute of the other or product differentiation; it is not even possible for the buyers to know about all these products, their qualities and prices. This leads to consumer’s exploitation by way of higher price for low quality product.
EXAMPLES OF MONOPOLISTIC COMPETITION IN INDIA
• The Indian fast moving consumer goods Market is a perfect example of monopolistic competition. It is a highly crowded market with a large number of national and global players competing on margins. The presence of large number of sellers is highlighted by the fact that the Indian Soap and Detergent market has 700 companies competing to sell their products. The major players across the globe are: ITC Limited, Procter & Gamble and Hindustan Unilever Limited.
• Food and Beverages – Similar product offerings make the competition stiff, however the major market share is enjoyed by a few Britannia, Nestle and Dabur, Coca-Cola India, Pepsi Co. to list a few established names.
• Telecommunications – Airtel, Idea, Reliance, Tata being the major service providers from the private sector, however state owned BSNL & MTNL enjoy a massive market share too.
It is a form of market in which there are a few big firms and a large number of buyers of a commodity. Each firm has a significant share of the market. Price and output decision of one firm significantly impacts the rival firms in the market.
Accordingly, there is a high degree of interdependence among the competing firms: price and output policy depends on the price and output policy of other(s).
Attributes of oligopoly
1. Small number of big firms: The most important characteristic of oligopoly is an industry dominated by a small number of large firms, each of which is relatively large compared to the overall size of the market. This characteristic gives each of the relatively large firm substantial market control.
2. Pricing decisions: oligopoly market is characterized by a small number of big firms in the industry. The market share of each firm is so significant that it leaves a notable impact on the price and output policy of the rival firms. So that, there is a very high degree of interdependence among the competing firms with regard to their price and output policy. Price and output behavior of the one firm often leads to reaction by other firms in the market.
3. Entry barriers: Oligopolies frequently maintain their position of dominance in a market because it is too costly or difficult for potential rivals to enter the market. Also existing firms continue to exercise monopoly control of the market through formation of cartels and trusts.
4. Nature of the Product:
The firms under oligopoly may produce homogeneous or differentiated product.
i. If the firms produce a homogeneous product, like cement or steel, the industry is called a pure or perfect oligopoly.
ii. If the firms produce a differentiated product, like automobiles, the industry is called differentiated or imperfect oligopoly.
5. Market power: When several firms control a significant share of market sales, the resulting market structure is called an oligopoly. An oligopoly may engage in collusion, and thereby exercise market power. A group of firms that explicitly agree to affect market price or output is called a cartel.
6. Difficult to trace market demand curve: Mutual interdependence creates uncertainty for all the firms. No firm can predict the consequence of its price-output policy. Under oligopoly a firm cannot assume that its rivals will keep their price unchanged if he makes change in its own price. This makes it impossible to draw any specific demand curve for a firm under oligopoly.
EXAMPLES OF OLIGOPOLY IN INDIA
• In India, the airways represent an oligopoly, with few competitors having the greatest shares. Two of the top airlines are the IndiGO and Air India and, while there are other airlines that provide specialized services, the major competitors rule the industry relevant to domestic air transportation market share in India.
• Another example for oligopoly market structure would be the automotive industry. A very small number of firms, not even more than a hundred firms hold almost 90% of the market share of cars. These are firms like ford, Volkswagen, Chevrolet, Toyota etc. The rest of the market share is owned by local car manufacturers and customizers like Tata motors, Maruti Suzuki India ltd. Mahindra and Mahindra ltd.
• Operating systems for smart phones and computers provide excellent examples of oligopolies. Apple iOS and Google Android dominate smartphone operating systems, while computer operating systems are overshadowed by Apple and Windows.