Question

1) List the five characteristics of monopolistic competitive market.

2) Explain the difference between a monopoly and a monopolistic competitive market.

3) How are they similar, and how are they different?

4) Describe the demand curve facing a monopolistic competitive market and how it differs from that facing a firm in a purely competitive market.

5) How can a firm be able to sustain itself while differentiating itself from its competitors?

Answer 1

1. Properties of monopolistic competition

• Large number of sellers
• Differentiated product
• No entry and exit barrier
• Control over price (price maker)
• Non price competition
• Advertising cost is very high.

2. Difference between monopoly and monopolistic competition

	Monopoly	Monopolistic
1.	Only one Seller	Large number of sellers
2.	Unique product	Differentiated product
3.	No close substitute available	A number of substitutes available
4.	Entry and Exit barrier	No entry and Exit barrier
5.	Full control over price	certain control over price
6.	Long run profit is not zero	in the long run profit is zero
7.	Advertisement cost is very low	High advertisement cost
8.	No competition	Fairly good competition

3. Similarity between monopoly and monopolistic competitions

• In both cases the profit is maximized at MR = MC
• The demand curve shifts downwards to the right and the corresponding MR curve is below it.
• Equilibrium point is below the Average Revenue curve.
• In both cases output is less than the efficient output.
• In both market structure the firms are price makers, that they have the market power.

4. The demand curve of a monopolistic firm is downward sloping to the right because the firm has market power that is they are price makers not price taker.

In perfectly competitive market the demand curve of an individual firm is represented by a straight horizontal line which is parallel to the horizontal axis. Since, the price is constant.

5. When a firm is differentiating it self from its competitors then, the firm can differentiate their product in the following

• Product differentiation - features, durability, reliability, performance wtc
• Service differentiation - delivery, after sales wtc
• Channel differentiation
• Relationship differentiation
• Reputation or image differentiation
• Price differentiation

With price differentiation we can definitely expand our market outreach but in order to sustain in the long run we have to create a brand image that we are different for example When we hear about lowest price the first name that comes to our mind is Wal-Mart. They are able to do so through their differentiation strategy.