Anna Sudak

# Business nuances

Types and characteristics of monopolistic competition

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

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Market monopolistic competition
Signs of monopolistic competition
Product differentiation
Advantages and disadvantages of monopolistic competition
Conditions for obtaining the maximum possible profit in the short run of 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 enterprises that produce differentiated products and control their 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 collected a lot of different firms producing 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 a huge number of manufacturers in each niche, which can be faster, more efficient and better.

The unreasonably high cost of 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. It 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 identify the 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 opportunities, innovative ideas and an uninterrupted source of inspiration for large corporations. The emergence of competitors spurs large companies to 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?

By comparing gross profit with gross costs.
Through comparison marginal income with marginal costs.

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 product. 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 revenue is greater than 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…

If there is a high probability of making a gross profit.
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 minimum expenses. 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:

Long Run Marginal Revenue (LMR) = Long Run Marginal Cost (LMC).

In the first case, total costs are compared with total income in various variations in the production of goods and their prices. The option where the difference between income and investments is maximum is best option behavior for the enterprise.

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

Efficiency and monopolistic competition

To identify the effectiveness of a monopolistic (and any market model) you need to know three indicators:

The cost of the finished product;
Average costs;
marginal cost.

If we compare all these indicators, we can observe the instability of monopolistic competition, and all because:

Often the price of the finished product is much higher than the marginal production cost (MC). This leads to a decline in supply and an increase in the cost of production. Of course, customers do not like this and they go to competitors in search of better conditions.
Monopolists have more resources. In fact, a huge amount of the production material base is idle. And society believes that such irrational use of resources has a negative impact on the economic situation as a whole. Although this is not entirely correct. If we talk about the material resources of monopolists, then it is they that allow such a phenomenon as product differentiation to exist. This gives the consumer the opportunity to choose. And this is a huge plus.

Therefore, to say that monopolistic competition is inefficient is not entirely objective, because it is thanks to the appearance of MK on the market that we can now get what we really need for the money we want to pay. And it's not so bad, right?

Monopolistic competition combines features of both monopoly and perfect competition. An enterprise is a monopolist when it produces a particular kind of product that is different from other products on the market. However, the competition of monopolistic activity is created by many other firms that produce a similar, not completely. This type of market is closest to the real conditions for the existence of firms that produce consumer goods or provide services.

Definition

Monopolistic competition is a situation in the market when many manufacturing firms produce a product similar in purpose and characteristics, while being monopolists of a particular type of product.

The term was introduced by the American economist Edward Chamberlin in the 1930s.

An example of monopolistic competition is the shoe market. A shopper may prefer a particular shoe brand for a variety of reasons: material, design, or hype. However, if the price of such shoes is excessively high, he can easily find an analogue. Such a restriction regulates the price of the product, which is a feature of perfect competition. The monopoly is provided by a recognizable design, patented production technologies, unique materials.

Services can also act as goods of monopolistic competition. A prime example is the activity of restaurants. For example, fast food restaurants. They all offer roughly the same dishes, but the ingredients often differ. Often, such establishments strive to stand out with a branded sauce or drink, that is, to differentiate their product.

Market Properties

The market of monopolistic competition is characterized by the following features:

It interacts with a large number of independent buyers and sellers.
Almost anyone can start working in the industry, that is, the barriers to entry into the market are quite low and are more related to legislative design production activities, obtaining licenses and patents.
To successfully compete in the market, the company needs to produce products that differ from the products of other firms in terms of properties and characteristics. This division can be either vertical or horizontal.
When setting the price of a product, firms are not guided either by production costs or by the reaction of competitors.
Both producers and buyers have information about the mechanisms of the market of monopolistic competition.
Competition for the most part is non-price, that is, the competition of product characteristics. The company's marketing policy, in particular advertising and promotion, has a significant impact on the development in the industry.

A large number of manufacturers

Perfect and monopolistic competition is characterized by large quantity manufacturers on the market. If hundreds and thousands of independent sellers operate simultaneously in a perfect competition market, then in a monopolistic market I offer several dozen firms. However, this number of manufacturers of the same type of goods is enough to create a healthy competitive environment. Such a market is protected from the possibility of collusion between sellers and artificial price increases with a decrease in production volumes. The competitive environment does not allow individual firms to influence general level market price.

Barriers to enter the industry

It is relatively easy to get started in the industry, but to successfully compete with existing firms, you will have to make efforts to differentiate your product more, as well as to attract customers. Significant investments will require advertising and "promotion" of the new brand. Many buyers are conservative and trust a time-tested manufacturer more than a newcomer. This can hinder the process of going to market.

Product differentiation

Main Feature monopolistic competitive market is the differentiation of products according to certain criteria. These can be real differences in the field of quality, composition, materials used, technology, design. Or imaginary, such as packaging, company image, trademark, advertising. Differentiation can be vertical or horizontal. The buyer divides the proposed similar products according to the quality criterion into conditionally “bad” and “good”, in this case we are talking about vertical differentiation. Horizontal differentiation occurs when the buyer focuses on their individual taste preferences, with other objectively equal characteristics of the product.

Differentiation is the main way a firm stands out and takes a place in the market. The main task: to determine your competitive advantage, target audience and set an acceptable price for it. Marketing tools help to promote products in the market and contribute to the growth of brand value.

With such a market structure, both large manufacturers and small enterprises focused on working with a specific target audience.

Non-price competition

One of the main features of monopolistic competition is non-price competition. Due to the fact that there are a large number of sellers on the market, price changes have little effect on the volume of sales. In such conditions, firms are forced to resort to non-price methods of competition:

put more effort into differentiation physical properties its products;
provide additional services (for example, service maintenance for technology);
attract customers through marketing tools (original packaging, promotions).

Profit maximization in the short run

In the short run model, one factor of production is fixed in terms of cost, while other elements are variable. The most common example of this is the production of a good requiring manufacturing capacity. If the demand is strong, in the short term, only the amount of goods that the factory capacity allows can be obtained. This is due to the fact that it takes a significant amount of time to create or acquire a new production. With good demand and an increase in price, it is possible to reduce production at the plant, but still have to pay for the cost of maintaining the production and the associated rent or debt associated with the acquisition of the enterprise.

Suppliers in monopolistic competitive markets are price leaders and will behave similarly in the short term. Just as in a monopoly, a firm will maximize its profit by producing goods as long as its marginal revenue equals its marginal cost. The price of profit maximization will be determined based on where maximum profit falls on the average revenue curve. Profit is the sum of the product multiplied by the difference between the price minus the average cost of producing the good.

As can be seen from the graph, the firm will produce the quantity (Q1) where the marginal cost (MC) curve intersects with the marginal revenue (MR) curve. The price is set based on where Q1 falls on the average revenue (AR) curve. The firm's profit in the short run is represented by the gray box, or the quantity times the difference between the price and the average cost of producing the good.

Because monopolistically competitive firms have market power, they will produce less and charge more than a perfectly competitive firm. This results in a loss of efficiency for society, but from a producer's point of view, desirable because it allows them to make a profit and increase the producer's surplus.

Profit maximization in the long run

In the long run model, all aspects of production are variable and therefore can be adjusted to reflect changes in demand.

While a monopolistic competitive firm may make a profit in the short run, the effect of its monopoly price will reduce demand in the long run. This increases the need for firms to differentiate their products, leading to an increase in the average total cost. A decrease in demand and an increase in cost causes the long-run average cost curve to become tangent to the demand curve at the profit-maximizing price. This means two things. First, that firms in a monopolistic competitive market will eventually incur losses. Secondly, the firm, even in the long run, will not be able to make a profit.

In the long run, a firm in a monopolistic competitive market will produce the quantity of goods where the long run cost (MC) curve intersects marginal revenue (MR). The price will be set where the quantity produced falls on the average income (AR) curve. As a result, the firm will suffer losses in the long run.

Efficiency

Due to product diversification, the firm is a kind of monopolist of a particular version of the product. This is where monopoly and monopolistic competition are similar. The manufacturer can reduce the volume of output, while artificially inflating the price. Thus, an excess of production capacity is created. From the point of view of society, this is inefficient, but it creates conditions for greater diversification of the product. In most cases, monopolistic competition is favored by society because, thanks to the variety of similar, but not exactly identical, products, everyone can choose a product according to their individual preferences.

Advantages

There are no serious barriers to entry into the market. The opportunity to make a profit in the short term attracts new manufacturers, which forces them to work on the product and apply additional measures stimulate demand old firms.
Variety of similar but not exactly identical products. Each consumer can choose a product according to personal preferences.
The market of monopolistic competition is more efficient than monopoly, but less efficient than perfect competition. However, from a dynamic perspective, it encourages manufacturers and retailers to use innovative technologies to maintain market share. From the point of view of society, progress is good.

Flaws

Significant advertising costs that are included in the cost of production.
Underutilization of production capacities.
Inefficient use of resources.
Fraudulent manoeuvres, which create false product differentiation, which misleads consumers and creates unreasonable demand.

Monopolistic competition is a market structure in which several dozen manufacturers of a similar, but not absolutely identical product operate on the market. This combines the features of both monopoly and perfect competition. The main condition for monopolistic competition is product diversification. The firm has a monopoly on a particular version of the product and may overprice, creating an artificial scarcity of the product. This approach encourages firms to use new technologies in production in order to remain competitive in the market. However, this market model contributes to overcapacity, inefficient use of resources and rising advertising costs.

Monopolistic competition- type of market structure of imperfect competition. 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.

Properties of monopolistic competition

Abstract model of monopolistic competition in the short run

A market with monopolistic competition is characterized by the following features:

The presence of many sellers and buyers (the market consists of a large number independent firms and buyers), but no more than under perfect competition.

Low barriers to entry into the industry. This does not mean that opening a monopoly competitive firm easily. Difficulties such as problems with registrations, patents and licenses take place.

To survive in the market in the long run, a monopolistically competitive firm needs to produce heterogeneous, differentiated products that differ from those offered by competing firms. Moreover, products can differ from one another in one or a number of properties (for example, in chemical composition);

Perfect awareness of sellers and buyers about market conditions;

Predominantly non-price competition, it can very slightly affect the overall price level. Advertising products is important for development.

Determining the price and volume of production of a monopolistic competitor. Efficiency and profitability

This type of firm has a negative demand curve. Under monopolistic competition, the volume of output is set at the level of profit maximization (marginal revenue is equal to marginal cost : ). However, when deciding to set a price for a product or service, a monopolistic competitor acts like a monopolist: the price for the product is set at the highest possible level, that is, at the level of the demand curve for the product.

Abstract model of monopolistic competition in the long run

Just as in a perfectly competitive market, a monopolistic competition firm relies on the value of average total costs(), deciding whether to stay in the industry or leave the market. Thus, if a firm is constantly incurring losses, which means that the average total cost of production exceeds the set price per unit of goods, then it will leave the market in the long run. It should be noted that since a monopolistic competitor is dynamic in decision making, he is not able to allocate resources efficiently, which leads to the inefficiency of such a firm in the long run; in a market of monopolistic competition, it is almost impossible to have a positive profit in the long run.

Characteristics 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 producers 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 more 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 products of the cosmetics industry, the production of clothing, footwear, etc.

Sources

Nureev R. M.; "Course of microeconomics", ed. "Norm"
D.Begg, S. Fischer, R. Dornbusch: Economics
F. Musgrave, E. Kacapyr; Barron's AP Micro/Macroeconomics
Mikhailushkin A.I., Shimko P.D. Economy. Proc. for technical universities. - M .: Higher. school, 2000.- S. 203

Wikimedia Foundation. 2010 .

See what "Monopolistic competition" is in other dictionaries:

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Monopolistic competition- the situation of market behavior of firms, intermediate between situations of free market and monopoly. According to the theory of monopolistic competition developed by E. Chamberlin, J. Robinson and other Western economists, ... ...

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7.4. PRICING IN CONDITIONS
MONOPOLISTIC COMPETITION

Perfect competition and monopoly are opposite extreme models of market structures. However, there may be intermediate models that are not fully competitive, are not controlled by a single vendor, and are much more common. Monopolies, owning even 99% of the market, cannot maintain their power for a long time. Over time, there are multiple divisions or mergers, which ultimately leads to the competition of strong rivals.

A. Marshall, because of his unwillingness to draw a distinction between perfect and less perfect competition, practically delayed the development of both the theory of competition and the theory of monopoly. However, the discrepancies between theory and reality were so obvious that the monopolistic competition model was an instant success in the 1930s. and extremely quickly entered the mainstream of microeconomic theory.

Under monopolistic competition, firms have some control over price. In contrast to the conditions of perfect competition, each individual producer, by changing the volume of output, can affect the price of his product.

This is possible if competing firms sell a non-standardized product. Capabilities differentiation goods in terms of quality appearance, reputation (trademark) and other characteristics give each seller a measure of monopoly power over the price.

On the market detergents, for example, many varieties of them are offered. Monopolistic competition is the confectionery market, household appliances etc. At the same time, firms face competition from existing firms or new firms entering the industry; The market is open for entry and exit.

Monopolistic competition A market structure in which many sellers compete to sell a differentiated product in a market where new sellers can enter.

The main features of a market with monopolistic competition:

The product of each firm trading in the market (differentiated product) is an imperfect substitute for the product sold by other firms, but its cross elasticity must be positive and relatively large. Product differentiation arises from differences in consumer properties, quality, service, advertising. Often the consumer pays not only for quality, but also for the brand.
There are a relatively large number of sellers in the market, each satisfying a small but not too small share of the market demand for a common type of product sold by the firm and its rivals. The share of the company must be more than 1%. In a typical case - from 1 to 10% of sales in the market during the year. None of the firms has a decisive advantage over the others.
Sellers in the market place no regard for the reactions of their rivals when choosing how much to charge or how much to produce. This is a consequence of the fact that the number of sellers is large and the decision of one of them has little effect on the position of others.
The market has conditions for free entry and exit. New firms are free to enter, but existing firms have an advantage and newcomers will have difficulty establishing a reputation as a new trademark or new services is not easy.

Thus, monopolistic competition is similar to monopoly, since individual firms can control the price, but it is also similar to perfect competition, since each product is sold by many firms and there is free entry and exit in the market.

7.4.1. DEMAND CURVE FOR PRODUCTS OF A MONOPOLISTICALLY COMPETITIVE ENTERPRISE

Since each competitor sells a variety of a certain good that is different from all others, he acts as a monopolist in relation to his group. regular customers. Therefore, the demand curve for his products has a negative slope and he himself determines the volume of his supply and price. But since the products produced by monopolistic competitors are easily interchangeable, the demand for the products of an individual competitor depends not only on the price of its products, but also on the prices of other competitors' products.

Schedule on rice. 7.28 demonstrates the differences in the behavior of enterprises in a monopoly and monopolistic competition. On rice. 7.28 line AB is the demand curve under complete monopoly, while the broken line CDEK is the demand curve under monopolistic competition.

The producer feels like a monopolist only in the interval Q 2 Q 3 . If he decides to reduce the volume to Q 1 so that the price is P 1 ", some buyers will go to

Rice. 7.28. Broken demand curve for products under monopolistic competition

competitors and the price will be set at the level P 1 Accordingly, when setting a low price P 4, the manufacturer expects to produce Q 4 ", however, his competitors have also reduced prices and he has to increase the volume to Q 4.

7.4.2. SHORT-TERM FIRM EQUILIBRIUM UNDER MONOPOLY COMPETITION

On which part of its demand curve a monopolistic competitor chooses a combination of P, Q, is determined by the Cournot point, while, most likely, the firm will receive a monopoly profit if P>AC.

Thus, a firm under monopolistic competition in the short run behaves like a monopolist, which is shown in Fig. rice. 7.29. The firm will produce Q MK units of production, focusing on the profit maximization condition for the monopoly MC=MR, at the demand price for a given output P MK. The shaded area above firm AC's average cost is the profit the firm will earn in the short run.

7.4.3. LONG-TERM EQUILIBRIUM UNDER MONOPOLY COMPETITION

However, in a market of monopolistic competition, this cannot last long. Economic profit will attract other firms to the industry, which will start producing a similar product, or the firm itself in the long run, trying to increase profits, can expand by building new facilities. This will lead to supply increase this type of product and price reduction.

For example, if one firm offers a whitening toothpaste, after determining the profitability, other firms will offer similar toothpastes to the market. In the long run, the D and MR curves will shift down for a given firm.

Long-run equilibrium in a market with monopolistic competition is similar to equilibrium under perfect competition in that neither firm earns more than normal profit ( rice. 7.30).

Thus, under conditions of monopolistic competition, as well as under perfect competition, the equilibrium price in the long run is equal to the average

costs and firms do not receive economic profit. However, in conditions of monopolistic competition, products will not be produced at the minimum average cost, as in perfect competition. Due to the negative slope of the D line, it touches the LAG curve to the left of the LAG low.

Consequently, in a state of long-run equilibrium, monopolistic competitors have excess production capacity, and because of this, differentiated goods are more expensive than standard goods. The shaded area rice. 7.30- Paying for diversity. If the product would be standardized and produced under perfect competition, then the condition P = MC = LAC min would be satisfied.

From the discrepancy between the estrus of long-term equilibrium and the point of minimum average costs, the following follows:

the market structure of monopolistic competition forces the buyer to overpay for the product. The payment for product differentiation is equal to the difference between the equilibrium price established under monopolistic competition and the price under perfect competition;
under monopolistic competition, the volume is less than the volume of production under perfect competition;
since at the long-run equilibrium point the demand price is higher than the firm's marginal cost, there will be buyers who would be willing to pay more for an additional unit of goods than the firm's cost would be. From the point of view of buyers, the industry underutilizes resources to produce the volume of goods they need. However, increasing output will cut firms' profits, so they won't.

Thus, the higher the degree of product differentiation, the more imperfect competition in the market and the greater the deviation of the capacities used, production volumes and prices from the most efficient ones.

Free entry to the market prevents firms from extracting economic profits in the long run. If, after achieving equilibrium in the market with

Rice. 7.29. Equilibrium of a firm under monopolistic competition in the short run

Rice. 7.30. Equilibrium of a firm under monopolistic competition in the long run

monopolistic competition will reduce demand, then firms will leave the market, as P

Advertising and other promotional activities are firms' attempts to increase demand for their product. If advertising is not important for a company in conditions of perfect competition due to the impossibility of influencing the price, for a monopolist - due to the absence of competitors, then for a company in conditions of monopolistic competition it is the main tool in the struggle for existence.

For example, according to Financial Newspaper, more than 10 domestic firms spend more than 1 million rubles on advertising in the press alone. These are such firms as Party, Vist, Samos, etc. Among the product groups, the most frequently advertised are: computers, electrical household goods, office equipment, audio and video equipment, cars, furniture, Construction Materials, means of communication.

Schedule on rice. 7.31 shows how a monopolistic competitor can increase its market share by spending on advertising. Advertising costs increased the cost per unit of output (AC 1, AC 2), but at the same time demand for the firm's products (D 1 , D 2) increased, and as a result, its revenue increased.

TR 2 = P 2 Q 2 > TR 1 = P 1 Q 1 .

Schedule on rice. 7.32 shows the profit of the firm after advertising in the short period. As already noted, significant costs are associated with advertising and other promotional activities, therefore, the average costs for any release after the advertising campaign will be AC 2, respectively

The profit-maximizing output is now the one for which MR 2 = MC 2 . On the graph, this is the point K 2, the output is equal to Q 2, the price is P 2, which corresponds to the demand curve D 2. In the absence of any advertising, this firm would earn zero economic profit, as shown in the graph (point E, where P 1 = AC 1). Advertising allows the firm to generate positive economic profits (shaded area). However, this is only possible in the short term.

But since entry into the market of monopolistic competition is free, the positive profit the firm earns as a result of additional advertising spending will attract new manufacturers to the market who will produce a similar product and imitate the marketing program of the successful firm. As a result, the demand and marginal revenue curves will shift down. The combination of increased costs and reduced demand in the long run will reduce the resulting economic profit to zero ( rice. 7.33).

However, since advertising has served to increase demand for all sellers in the monopolistic market and has contributed to the entry of new producers into the market, the total consumption of the product increases and excess capacity is lower than it would be in the absence of advertising.

Monopolistic competition. The behavior of the firm in conditions of monopolistic competition

Monopolistic competition is a type of market imperfect competition , in which sellers of differentiated products compete with each other for sales volumes. The products of firms in a monopolistic competition market are close, but not completely interchangeable, that is, each of the many small firms produces a product that is somewhat different from the products of its competitors.

The number of firms on the market can reach 25, 40, 60, etc. These include restaurants, bakeries, service stations, toothpaste, soap, deodorant, washing powder, drug market, etc.

The market of monopolistic competition is characterized by the following main features :

The presence of many sellers and buyers (the market consists of a large number of independent firms and buyers), but less than under perfect competition.
The production of differentiated products that have many close but imperfect substitutes. Product differentiation can be based not only on differences in the quality of the product itself, but also on those services that are associated with its maintenance. Attractive packaging, more convenient location and shop hours best service a visitor, a discount - all this can attract a buyer.
Low barriers to entry into the industry. This does not mean that starting a monopoly competitive firm is easy. Difficulties such as problems with registrations, patents and licenses take place in the market of monopolistic competition.
Awareness of sellers and buyers about market conditions.
Presence of both price and non-price competition. Non-price competition uses such non-price product parameters as novelty, quality, reliability, prospects, compliance with international standards, design, ease of use, after-sales service conditions, etc.

In the short run, the firm's behavior under monopolistic competition much the same behavior monopolies . Since the product of this firm differs from the products of competing firms in special quality characteristics, which appeal to a certain category of buyers and a sufficient number of consumers are willing to pay a higher price, then the firm can raise the price of its product without falling sales.

Like a monopoly, a firm underproduces a little and overprices it. Thus, monopolistic competition is similar to a monopoly situation in that firms have the ability to control the price of their goods.

In the long run, monopolistic competition similar perfect competition . With free market access, the potential for profit attracts new firms with competing brands, driving profits to zero. The same process works in reverse as well. If demand in a monopolistic competition market declined after equilibrium was reached, firms would leave the market.

This is because a reduction in demand would make it impossible for firms to cover their economic costs. They will exit the industry and move their resources to more profitable ventures. As a result, the demand and marginal revenue curves of the remaining sellers in the market will shift upwards. The exit of firms from the industry will continue until a new equilibrium is reached.