Meaning Monopolistic Competition:
The two important subdivisions of imperfect competition are monopolistic competition and oligopoly. Most of the economic situations “are composites of both perfect competition and monopoly”. Chamberlin’s monopolistic competition is an amalgam or an admixture of perfect competition and monopoly.
Thus, monopolistic competition has elements of both perfect competition and monopoly. That is why it is said that this market form, in some sense, is akin to perfect competition and, in some other sense, is akin to monopoly. Since monopolists compete among themselves we call such market monopolistic competition.
Characteristics Monopolistic Competition:
Chamberlin’s theory of monopolistic competition has the following characteristics:
i. Large Number of Sellers:
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Like perfect competition, there are a large number of sellers and buyers. But the ‘number’ is not too large like perfect competition. As a result, each firm has an insignificant share in the market so that action of one seller does not affect rival sellers to any great extent. Every seller in this market form believes that his actions will go unnoticed by his rivals in the market. Thus, each seller behaves independently in the market.
ii. Differentiated Products:
Sellers sell differentiated products, but they are close— but not perfect—substitutes. Buyers may not mind if they do not get Lux soap rather than Rexona. Different varieties of soap that are available in the Indian market are slightly differentiated products and, hence, close substitutes. It is the degree of differentiation that creates both monopoly and competitive elements.
Every product is unique to the buyers. So every seller enjoys some degree of monopoly of his own product over other sellers. But since these goods are close substitutes, sellers face competition. Because of brand loyalty of buyers, sellers exercise some monopoly power.
And sales of closely related goods create a competitive environment. Thus monopolists compete among themselves. It is product differentiation that enables monopolistically competitive firms to possess market power with competition amongst the firms. In this market, monopoly power is, therefore, small.
iii. Elastic Demand Curve:
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Since product of each seller is slightly different from his rivals he enjoys some degree of monopoly power and, hence, can raise the price of his product without losing most customers. But as other rival firms produce closely related goods, every firm faces competition and its influence over the price of the product is rather limited.
Thus, each firm has a downward sloping demand curve implying that it behaves as a price-maker. Since a seller faces a large number of competitors to whom buyers may turn, the demand curve is more elastic.
iv. Non-Price Competition:
Besides price competition, Chamberlin suggested cases of non-price competition that arise due to product variation and selling activities. Seller always tries to establish the fact that his product is superior to others by improving the quality of his product.
And in doing so, he incurs selling costs or makes advertisement to attract more customers in his fold. It is the product differentiation that causes selling costs to emerge, in addition to production costs.
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In Chamberlin’s model, demand for any commodity is not only affected by the price of a commodity but also by non-price competition (i.e., product variation and selling activities). Selling costs or advertising outlays are peculiar to this market.
v. Free Entry and Exit:
Like perfect competition, there is complete freedom of entry and exit.
vi. Product Group:
Chamberlin used the term ‘group’ rather than industry. An industry is a set of firms that produces homogeneous goods. But under monopolistic competition, goods are heterogeneous or slightly differentiated. Thus, the term ‘industry’ cannot be applied here. That is why Chamberlin used ‘product group’ which is defined as a collection of firms producing almost similar goods, but not identical goods.