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What is Monopolistic Competitive Market ?

Updated on May 17, 2016
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IRSHAD CV has been a student in Economics. Now he is doing Masters in Economics. He completed B.A. Economics from the University of Calicut.

Most of the general commodity markets are the example of monopolistic competitive market.
Most of the general commodity markets are the example of monopolistic competitive market. | Source

Introduction

The analysis of monopolistic form of market was come in to existence by 1930s. Actually till 1920s, the economists developed two market forms called perfect competition and monopoly market. The perfect competition model was not a real one but an ideal form. So it never plays any significance in the real world to analyze the economy. Monopoly was another form, which is based on a single firm or seller. This is also not an ordinary condition of the world markets. There are rare examples for monopoly market systems. That is why economists developed a new market form called ‘Monopolistic Competitive Market’.

The base for the development of monopolistic market was two publications by Edward Chamberlain's “Theory of Monopolistic Competition” (Harvard University) in 1933 and Joan Robinson’s “The Economics of Imperfect Competition” in 1933. The contents of both the works were almost same. So, the monopolistic competition is also known as Chamberlain's model or large group model.

Characteristics of Monopolistic Competition

Monopolistic market is one where large number of buyers and sellers interacts to meet their demands and supplies. Monopolistic firms are producing substitutable commodities. That means, different commodities can be used for the same purposes. Following are the major characteristics of monopolistic market.

a) There are large numbers of buyers and sellers in the market and contact each other for the purpose of selling and buying.

b) Any new firm can enter into the industry and any existing firm can withdraw from the industry. There are no restrictions. The market is free to investors to invest and free to withdraw for the existing firms.

c) Each firm competing with its rivals very strongly. And their ultimate aim is to make maximum profit from the business.

d) Chamberlain developed ‘Heroic’ assumption. By this Chamberlain means, any new firm can enter to the market. Further the demand and cost curve are uniformed, because to support the assumption that the firms are behaving as a group.

Product Differentiation of Monopolistic Firms

This is an important feature of monopolistic firms. Since the number of sellers is very large and they are supplying substitutable products, they face competition. Product differentiation is a tool to compete with rival firms. Each product of different firms would have their own features and qualities. Each firm will try to differentiate their products in packing, color, size etc. This may highlights in the advertising of the products. In a monopolistic competitive market, advertisement is an important part of sales promotion. Here each firm would have their own strategies in advertisement.

Conclusion

Monopolistic competitive market is a form of market developed in 1930s. Even though the concept is an old one, there are few examples which we can see in the real world like teeth pastes, footwear etc. It is a market form with a group of many firms competing with each other.

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