Firms in monopolistic competition don't take into consideration how their decisions influence competitors. This affects the profits of the existing firms and doesn't allow these companies to obtain abnormal profits. With the arrival of new companies, the supply increases, and the price decreases. New firms are inclined to join it when existing businesses obtain great revenue. Businesses can easily enter and exit the market. Their power lies in the number of competitors, which is relatively low, independence in decision making, and differentiated goods. Besides, companies are price makers and can increase the prices without losing customers and triggering a price war among their competitors. They have control over the terms and conditions of exchange. Firms have market power, albeit very low. However, they still differ in quality, packaging, style, reputation, branding, and appearance. We can't omit the fact that these goods perform a similar function. However, these products can't completely replace the products of competitors. It can be the location of the product or its intangible aspects. Products and services have only a slight non-price difference. These firms operate according to the rules of the market and make decisions independently from other businesses. This market structure works out when many companies offer similar but not identical goods. Let's explore the characteristics of this market structure that will enable you to understand the principles of monopolistic competition. Now that we have cleared that up, it's time to proceed to the features of monopolistic competition.Ĭharacteristics of Monopolistic Competition In the long and short run, these businesses show that they are productively inefficient. Since mass production is a complicated process, companies can't fully exploit their fixed factors, and it results in firms demonstrating excess capacity. This leads to unemployment because workers have nothing to do. The resources often lie idle because companies don't fully use their production capacity despite it being large. This step isn't crucial since it increases the price of a product or service and makes a company lose leads and customers. It's worth noting that firms engaged in this kind of market system often spend significant sums of money on advertising. This market model is a type of imperfect competition and is considered inefficient because of selling costs, excess capacity, lack of specialization, and unemployment. Why is monopolistic competition inefficient? Advantages and Disadvantages of Monopolistic Competition. Who sets the price in monopolistic competition?.Characteristics of Monopolistic Competition.Why is monopolistic competition inefficient?.
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