What is Monopolistic Competition?
Contemplate a market system where the number of enterprises are large, there is free entry and exit of enterprises, but the commodities manufactured by them are not homogeneous. Such a market system is known as monopolistic competition.
This type of monopolistic competition is more frequently visible. For instance, there are exists large numbers of chocolate manufacturing enterprises. But many of the chocolates being manufactured are related to some brand name and are recognisable from one another by these brand names and packaging and are slightly distinct in taste. The customer develops a taste for a particular brand of chocolate over time or tends to become loyal to a particular brand for some cause, and is hence, not immediately ready to replace it for another biscuit.
However, if the price difference becomes large, the consumer would be willing to choose chocolate of another brand. A customers’ penchant for a brand will often differ in depth, so the change in cost price required for the customer to change the brand may differ. Hence, if the cost price of a particular brand is decreased, some customers will shift to utilising that brand. Decreasing the cost price further will lead to more customers shifting to the brand with a decrease in the price.
Therefore, the demand curve faced by the enterprise is not perfectly elastic, as is the scenario with perfect competition. The demand curve confronted by the enterprise is also not the market demand curve, as in the scenario with a monopoly. In the scenario of monopolistic competition, the enterprise expects a rise in demand if it decreases the cost price.
Recollect that the demand curve of an enterprise is also its Average Revenue curve. This enterprise hence has a downward sloping Average Revenue curve. The MR is less than the AR and also downward sloping. The enterprise increases its output whenever the marginal revenue is greater than the marginal cost.
This is a detailed and elucidated information about the concept of Monopolistic Competition. To learn more, stay tuned to BYJU’S.