Which of the features of monopolistic competition is indicated inaccurately. Monopolistic competition: features, conditions, examples. Conditions for obtaining the maximum possible profit in the short run of monopolistic competition

- This is one type of market structure in which a large number of enterprises produce differentiated goods. The main feature of this structure is in the products of existing enterprises. It is very similar, but not completely interchangeable. This market structure gets its name from the fact that everyone becomes a small monopolist that produces their own special version of the product, and also because of the many competing firms that produce similar products.

The main features of monopolistic competition

• Differentiated products and a large number of competitors;
• A high degree of rivalry ensures price as well as fierce non-price competition (advertising of goods, profitable terms sales);
• The absence of dependence between companies almost completely eliminates the possibility of secret agreements;
• Free opportunity to enter and exit the market for any enterprise;
• Decreasing, forcing to constantly revise the pricing policy.

In the short term

Under the conditions of this structure, up to a certain point, demand is quite elastic with respect to price, however, the calculation of the optimal level of production that allows maximizing income is similar to a monopolistic one.

Demand line for a product DSR, has a steeper slope. Optimal production volume QSR, allowing you to get the maximum income, be at the point of intersection of marginal income and costs. Optimal price level P SR, corresponds to a given volume of production, reflects the demand DSR, since this price covers the averages and also provides a certain .

If the cost is below the average cost, the company needs to minimize its losses. In order to understand whether it is worth releasing products, it is necessary to determine whether the price of products exceeds . If above variable costs, then the entrepreneur should produce the optimal volume of production, since it will cover not only variable, but also part of the fixed costs. If the market value is lower than variable costs, then the release of products should be delayed.

In the long run

In the long term, other companies that have entered into begin to influence the size of profits. This leads to the fact that the total purchasing demand is distributed among all companies, the number of substitute goods increases and the demand for the products of a particular firm decreases. In an attempt to increase the level of sales, existing companies spend money on advertising, promotion, improving the quality of goods, etc., and, consequently, costs increase.

This market situation will continue until the potential profit that attracts new companies disappears. As a result, the firm remains both without losses and without income.

Economic efficiency and disadvantages

The market of monopolistic competition is the most favorable option for buyers. Product differentiation provides a huge choice of goods and services for the population, and the price level is determined by consumer demand, not by the enterprise. The equilibrium price in monopolistic competition is higher margin cost, in contrast to the level of prices for products, which are set on competitive market. That is, the price paid by consumers of additional goods will exceed their production.

The main disadvantage of monopolistic competition is the size of existing enterprises. The rapid incurrence of losses from scaling up greatly limits the size of firms. This provides stability and uncertainty market conditions and small business development. In the case of insignificant demand, firms can suffer significant financial losses and go bankrupt. And limited financial resources do not allow enterprises to use innovative technologies.

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Anna Sudak

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# Business nuances

Types and characteristics of monopolistic competition

A striking example of this type of competition in Russia is the mobile communications market. There are many companies in it, each of which is trying to lure a client to itself through a variety of promotions and offers.

Article navigation

• Monopolistic competition market
• Signs of monopolistic competition
• Product differentiation
• Advantages and disadvantages of monopolistic competition
• Conditions for obtaining the maximum possible profit in short term monopolistic competition
• Maximum profit in long term monopolistic competition
• Efficiency and monopolistic competition

Monopolistic competition (MC) is one of the market structures with a large number of enterprises that produce differentiated products and control its cost to the end consumer. Although this market model is not perfect competition, it is very close to perfect.

To put it simply, MK is a market (a separate industry) that has brought together many different companies that produce similar products. And each of them has a monopoly over its product. That is, the owner who decides how much, how, how much and to whom to sell.

Monopolistic competition market

This definition, or rather the basis of the concept itself, was presented back in 1933 in his book The Theory of Monopolistic Competition by Edward Chamberlin.

To correctly characterize this market model, Consider this symbolic example:

The consumer loves Adidas sneakers and is willing to shell out for them more money than for competitors' products. After all, he knows what he pays for. But suddenly the company that produces his favorite shoes raises prices by three, five, eight ... times. At the same time, similar shoes from another company are several times cheaper.

It is clear that not all Adidas fans can afford such an expense item and will look for other, more profitable options. What happens next? The company's customers are slowly but surely migrating to competitors who are willing to carry them in their arms and give them what they want for the price they can pay.

Let's see what MK really is. Let's try to make it short. Yes, of course, the manufacturer has some power over the product they produce. However, is this true? Not really. After all, the monopolistic model of the market is great amount manufacturers in each niche, who can be faster, more efficient and better.

unreasonably high price goods that satisfy the same need can both play into the hands and ruin the manufacturer. Moreover, competition in niches is getting tougher. Anyone can enter the market. It turns out that all companies are sitting on a powder keg, and yet it can explode at any moment. So firms have to act in conditions of monopolistic competition, using their full potential.

Signs of monopolistic competition

• The market is divided between companies in equal parts.
• Products of the same type, but not a full replacement for something. She has common features, similar characteristics, but also significant differences.
• Sellers put a price tag without taking into account the reaction of competitors and production costs.
• The market is free to enter and exit.

In fact, MK includes signs of perfect competition, namely:

• A large number of manufacturers;
• Failure to take into account the competitive reaction;
• No barriers.

The monopoly here is only the regulation of the price of products for the end user.

Product differentiation

At the beginning of the article, we already said that under monopolistic competition, producers sell differentiated products. What is it? These are products that satisfy the same user need, but have some differences:

• quality;
• manufacturing materials;
• design;
• brand;
• technologies used, etc.

Differentiation is a marketing process used to promote products in the market, increase their value and brand value. In general, this is a tool for creating competitiveness between manufacturers of certain things.

Why is a differentiation strategy useful? Because it makes it possible for absolutely all companies on the market to survive: both “mature” enterprises and new firms that create products for a specific target audience. The process reduces the impact of resource endowment on firms' market share.

For stable functioning, it is enough for an enterprise to determine its forte (competitive advantage), clearly indicate target audience for which the product is being created, identify its need and set an acceptable price for it.

A direct function of differentiation is the reduction of competition and production costs, the difficulty in comparing products and the opportunity for all manufacturers to take their “place in the sun” in a chosen niche.

Advantages and disadvantages of monopolistic competition

And now consider the "medal" from two sides. So, in any process there are both advantages and disadvantages. MK is no exception.

Positive	Negative
A huge selection of goods and services for every taste;	Increased spending on advertising and promotion;
The consumer is well informed about the benefits of the commodity items he is interested in, which makes it possible to try everything and choose something specific;	Overcapacity;
Everyone can enter the market and bring their ideas to life;	A huge amount of unreasonable spending and inefficient use of resources;
New features, innovative ideas and an uninterrupted source of inspiration for large corporations. The emergence of competitors spurs large companies make products better;	"Dirty" tricks are used, such as pseudo-differentiation, which makes the market less "plastic" for the consumer, but brings super profits to the manufacturer;
The market is independent of the state;	Advertising generates unreasonable demand, due to which it is necessary to rebuild the production strategy;

Conditions for obtaining the maximum possible profit in the short run of monopolistic competition

The goal of any business is money (gross profit). Gross profit (Tp) is the difference between total revenue and total costs.

Calculated by the formula: Tp = MR - MC.

If this indicator is negative, the company is considered unprofitable.

In order not to burn out, the first thing a salesperson needs to do is figure out how much to produce to maximize gross margins, and how to minimize gross costs. Under what conditions under such a scenario will the company receive the maximum earnings in the short term?

1. By comparing gross profit with gross costs.
2. By comparing marginal revenue with marginal spending.

These are two universal conditions that are suitable for absolutely all market models, both imperfect (with all its types) and perfect competition. And now let's start the analysis. So, there is a market with crazy competition and already formed price for the goods. The company wants to enter it and make a profit. Quickly and without unnecessary nerves.

For this you need:

• Determine whether it is worth producing products at that price.
• Determine how many products you need to produce to be in the black.
• Calculate the maximum gross profit or minimum gross costs (in the absence of profit) that can be obtained by producing the selected volume of output.

So, based on the first condition, where the revenue more costs, it can be argued that the goods need to be produced.

But not everything is so clear-cut here. The short term has its own characteristics. In it, gross costs are divided into two types: fixed and variable. The first type of company can carry even in the absence of production, that is, be in the red at least by the amount of costs. Under such conditions, the enterprise will not see profit at all, but will be “covered” by a wave of permanent losses.

Well, if the value of the total loss in the manufacture of a certain amount of goods is less than the cost of "zero production", the production of products is 100% economically justified.

Under what circumstances is it profitable for a company to produce in the short run? There are two of them. Again…

1. If there is a high probability of making a gross profit.
2. If the profit from sales covers all the variables and part of the fixed costs.

That is, the firm must produce so many goods that the revenue is maximized or the loss is minimal.

Consider three cases for comparing gross profit with gross costs (the first condition for obtaining the maximum profit in the shortest possible time):

• profit maximization;
• minimization of production costs;
• company closure.

Profit maximization:

Three in one. Profit maximization, loss minimization, firm closing. The diagram looks like this:

Let's move on to comparing marginal revenue (MR) with marginal cost (MC) (the second condition for maximizing profit in the short term):

MR = MC is a formula that determines the equality of marginal revenue with marginal cost.

This means that the product produced gives the maximum profit with the minimum cost. This formula is characterized by:

• High income at minimal cost;
• Profit maximization in all market models;
• In some cases, the price of production (P) = MC

Maximum profit in the long run of monopolistic competition

The hallmark of the long run is the absence of costs. This means that if the enterprise ceases to function, it will not lose anything. Therefore, by default, there is no such thing as “loss minimization”.

Playing according to this scenario, the monopolist chooses for himself one of the lines of behavior:

• profit maximization;
• limits on pricing;
• rent.

Two approaches are used to determine the behavior of an enterprise:

1. Long-term marginal revenue (LMR) = long-term marginal cost(LMC).

In the first case, they compare general expenses with a total income in various variations in the production of a commodity and its price. The option where the difference between income and investments is maximum is the best behavior for the enterprise.

In the second, the combination of the optimal cost of production and profit is equal to production costs.

In this section, we will look at the market structure in which numerous firms selling close but not perfect substitute products. This is commonly called monopolistic competition — monopoly in the sense that each manufacturer is above its version of the product and - since there is a significant number of competitors selling similar products.

The basis of the model of monopolistic competition and the name itself were developed in 1933 by Edward H. Chamberlain in his work "The Theory of Monopolistic Competition".

The main features of monopolistic competition:

• Product differentiation
• A large number of sellers
• Relatively low barriers to entry and exit from the industry
• Rigid not price competition

Product differentiation

Product differentiation is a key characteristic of this market structure. It assumes the presence in the industry of a group of sellers (manufacturers) who produce goods that are close, but not homogeneous in their characteristics, i.e. goods that are not perfect substitutes.

Product differentiation can be based on:

• the physical characteristics of the goods;
• location;
• "imaginary" differences related to packaging, trademark, company image, advertising.
• In addition, differentiation is sometimes divided into horizontal and vertical:
• vertical is based on the division of goods by quality or some other similar criterion, conditionally into "bad" and "good" (the choice of TV is "Temp" or "Panasonic");
• horizontal assumes that at approximately equal prices, the buyer divides goods not into good or bad, but into those that correspond to and do not correspond to his taste (the choice of a car is Volvo or Alfa-Romeo).

By creating its own version of the product, each firm acquires, as it were, a limited monopoly. There is only one manufacturer of Big Mac sandwiches, only one manufacturer of Aquafresh toothpaste, only one publisher of the School of Economics, and so on. However, they all face competition from companies offering substitute products, i.e. operate under monopolistic competition.

Product differentiation creates an opportunity limited influence on market prices, since many consumers remain committed to a particular brand and firm even with some price increase. However, this impact will be relatively small due to the similarity of products of competing firms. The cross elasticity of demand between the products of monopolistic competitors is quite high. The demand curve has a slight negative slope (in contrast to the horizontal demand curve under perfect competition) and is also characterized by high price elasticity of demand.

A large number of manufacturers

Similar to perfect competition, monopolistic competition is characterized by a large number of sellers, so that the individual firm occupies a small share of the industry market. As a consequence, a monopolistic competitor is usually characterized by both absolute and relatively small size.

A large number of sellers:

• one side, excludes the possibility of collusion and concerted action between firms to limit output and raise prices;
• with another - does not allow firm in a significant way influence market prices.

Barriers to entry into the industry

Entry into the industry usually not difficult due to:

• small ;
• small initial investment;
• small size of existing enterprises.

However, due to product differentiation and brand loyalty, market entry is more difficult than under perfect competition. New firm should not only produce competitive products, but also be able to attract buyers of existing firms. This may require additional costs for:

• strengthening the differentiation of its products, i.e. providing it with such qualities that would distinguish it from those already available on the market;
• advertising and sales promotion.

Non-price competition

Rigid non-price competition is also a characteristic feature of monopolistic competition. A firm operating under monopolistic competition may apply three main strategies impact on sales volume:

• change prices (i.e. implement price competition);
• produce a product with certain qualities (i.e. strengthen differentiation of your product technical specifications , quality, services and other similar indicators);
• revise advertising and marketing strategy (i.e. strengthen the differentiation of your product in the field of sales promotion).

The last two strategies are related to non-price forms of competition and are more actively used by companies. On the one hand, price competition is difficult due to product differentiation and consumer loyalty to a particular brand (price reduction may not cause such a significant outflow of buyers from competitors to compensate for loss in profits), with another- a large number of firms in the industry leads to the fact that the effect of the market strategy of an individual company is distributed among such a large number competitors, which will be practically insensitive and will not cause an immediate and targeted response from other firms.

It is usually assumed that the model of monopolistic competition is most realistic in relation to the service market ( retail, services of private practitioners of doctors or lawyers, hairdressing and beauty services, etc.). With regard to material goods, such as various brands of soap, toothpaste or soft drinks, their production, as a rule, is not characterized by small size, large numbers or freedom of entry into the market of manufacturing firms. Therefore, it is more correct to assume that the wholesale market for these goods belongs to the oligopolistic structure, and the retail market - to monopolistic competition.

The market of monopolistic competition consists of a large number of consumers and sellers who transact not according to the general market value and in a wide range of prices. The presence of a range of prices is explained by the ability of sellers to offer consumers various options for goods. These products may vary in quality, properties, external design. Differences may also lie in the services associated with the goods. Consumers see the difference in offers and are willing to pay for goods in any way. In order to stand out with something other than price, sellers seek to create different offers for different consumer segments and use extensively the practice of assigning brand names to goods, advertising and methods of their own sale. Due to the presence of a large number of competitors, their marketing strategies have less impact on any individual company than in an oligopolistic market.

Monopolistic competition does not require the presence of hundreds or thousands of companies, a relatively small number of them, for example, 25, 35, 60 or 70 in any industry, is enough. From the presence of so many companies, several significant indicators of monopolistic competition follow:

• 1. Small market share. Each company owns a relatively small share of the total market and therefore has too little control over market prices.
• 2. The impossibility of collusion. The presence of a relatively large number of companies ensures that collusion, concerted action to limit production and artificially increase prices is almost impossible.
• 3. Independence of action. When there are a large number of companies in the industry. There is no rigid mutual dependence between them; any company characterizes its own policy, without taking into account the likely reaction from competitors.

In contrast to perfect competition, one of the main indicators of monopolistic competition is product differentiation. In conditions of monopolistic competition, companies create products that are somewhat different from competitors' products in terms of distinctive external attributes (features) of the product, quality of services, location and availability of products, or other features.

Entering an industry with monopolistic competition is relatively easy. That producers in such industries are generally considered to be small in size, both in absolute and relative terms, implies a negligible effect of scale and the presence of little capital. However, in contrast to the conditions of perfect competition, this option may have additional financial barriers generated by the need to obtain a product that is different from the product of rivals, and the obligation to announce this product. Also, existing firms are likely to have product patents and copyrights to factory marks and trade symbols, which increases the difficulty and cost of copying them.

The exit of firms from industries with monopolistic competition is relatively simple. Nothing prevents an unprofitable firm in an industry with monopolistic competition from reducing production or shutting it down.

The market of monopolistic competition implies the presence of features of both monopoly and competition, that is, it is a market with a significant amount of competition and a certain amount of monopoly.

The theory of monopolistic competition is based on three assumptions:

• - product differentiation;
• - a large number of sellers;
• - independent entry into and exit from the industry.

In practice, this means the following:

First of all, any of the companies in the industry implements its own special kind or product variant. In this situation, the market products are said to be differentiated.

Differentiation means that any company tries to make its own product different from the products of other companies in order to interest consumers. The more it manages to make its own product different from the products of other companies that produce similar products, the more monopoly power she owns, the less elastic the demand curve for her product. At the same time, product differentiation has the ability to take on a number of various forms.

• 1. Products have every chance to differ in their own physical or high-quality characteristics. "True" differences, including high-functional features, materials, design, and workmanship, are considered to be the most important aspects of product differentiation.
• 2. Offers and conditions for their provision are considered the main nuance of product differentiation. One store has the ability to give a distinctive value to the quality of customer service. His employees will pack the purchases and take them to the consumer's car. Big competitor retail store has the ability to let customers personally pack and carry their own purchases, while selling them at the lowest prices.
• 3. Products can also be differentiated based on location and availability. Small grocery stores and kiosks successfully compete with large supermarkets, despite the fact that the latter have a much wider range of goods. Owners of smaller grocery stores and kiosks locate them close to consumers, in busier areas, often open 24 hours a day.
• 4. Differentiation can also be considered as the result of imaginary differences developed through advertising, packaging and branding and trademarks. When a product brand is associated with the name of a celebrity, it can affect the demand for these products from customers.

Buyers focus on specific sellers' products and pay the highest price for those products to suit their own preferences.

Secondly, there are relatively many manufacturers in the market. A relatively large number implies the presence of 25, 35, 60 or 70 manufacturers. As a result, companies own relatively small parts of the market and therefore have rather limited control over the market price. This environment also ensures that companies fail to assert their influence in order to change production volumes or artificially increase prices. That producers under monopolistic competition are considered to be acceptably small in size, both in absolute and relative terms, implies that economies of scale and the capital required are small. Consequently, the situation that has arisen allows the company not to look back at the reaction of competitors with a slight increase in sales by reducing prices for own products because the impact of her actions would be so negligible to any of them that they would have no reason to pay attention to her actions.

Thirdly, there are no restrictions on the entry of new companies into the industry, as a result of which it is easy for new companies to enter the market with their brand names, and for existing companies to exit if their products are no longer in demand.

Where market power sellers of a differentiated product compete for sales volume. This is a common type of market that is closest to perfect competition.

Monopolistic competition is not only the most common, but also the most difficult to study form of industry structures. An exact abstract model cannot be built for such an industry, as can be done in cases of pure monopoly and pure competition. Much here depends on the specific details that characterize the manufacturer's product and development strategy, which are almost impossible to predict, as well as on the nature of the strategic choices available to firms in this category.

Thus, most of the world's enterprises can be called monopolistically competitive.

Definition

The foundations of the theory of monopolistic competition were laid by Edward Chamberlin in his 1933 book The Theory of Monopolistic Competition.

Monopolistic competition is characterized by the fact that each firm in the conditions of product differentiation has some monopoly power over its product: it can raise or lower the price of it, regardless of the actions of competitors. However, this power is limited both by the presence of a sufficiently large number of manufacturers of similar goods, and by considerable freedom of entry into the industry of other firms. For example, "fans" of Reebok sneakers are willing to pay a higher price for its products than for products of other companies, but if the price difference is too large, the buyer will always find analogues of lesser-known companies on the market at a lower price. The same applies to the products of the cosmetics industry, the production of clothing, footwear, etc.

Market Properties

Product differentiation

Equilibrium of the firm of a monopolistic competitor

In the short term

Monopolistic competitors do not have significant monopoly power, so the dynamics of demand will differ from that of the monopoly. Due to the fact that there is competition in the market, in the event of an increase in the price of the products of the first firm, consumers will turn to another, so the demand for the products of each of the firms will be elastic. The level of elasticity will depend on the degree of differentiation, which is a factor in the binding to the products of each of the firms. The optimal output of each firm is determined similarly to the case of pure monopoly. Based on the graph, it should be noted that the price is determined by the demand curve. The presence of profit or loss depends on the dynamics of average costs. If the ATC curve passes below Po, then the firm makes a profit (shaded rectangle). If the ATC curve is higher, then this is the amount of loss. If the price does not exceed the value of average costs, then the firm stops activities.

In the long run

In the long run, as in the case of perfect competition, the presence economic profit will lead to an influx of new firms into the industry. In turn, the supply will increase, the equilibrium price will decrease, and the amount of profit will decrease. Ultimately, a situation occurs when the last firm to enter the market does not receive economic profit. The only way to increase profits is to increase product differentiation. However, in the long run, in the absence of legal barriers to firms, competitors will be able to copy those areas of differentiation that increase profits. Therefore, it is assumed that firms will be in relatively the same conditions. Because the demand curve is sloping, equilibrium between price and average cost will be reached before the firm can minimize costs. Therefore, the optimal volume of a monopolistic competitor will be less than the volume of a perfect competitor. This balance allows us to conclude that in the long run the main goal of the company is to break even.

Monopolistic Competition and Efficiency

As in the case of a monopoly, a monopolistic competitor has monopoly power, which allows, by creating an artificial shortage, to raise the price of products. However, unlike a monopoly, this power arises not from barriers, but from differentiation. A monopolistic competitor does not try to minimize costs, and because the average cost (AC) curve denotes a certain technology, this indicates that the firm is underutilizing the available equipment (that is, it has excess capacity). From the point of view of society, this is inefficient, since part of the resources is not used. At the same time, the presence of excess capacity creates conditions for differentiation. As a result, consumers are able to buy a variety of goods according to their taste, so society needs to balance the satisfaction of variety against the price of less efficient use resources. More often than not, society favors the existence of monopolistic competition.

Literature

• Monopolistic competition theory / G. D. Gloveli // Great Russian Encyclopedia: [in 35 volumes] / ch. ed.