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231, , MONOPOLISTIC, COMPETITION, , , , , , , , SASS — _. : j SaaS, , 15.1 Features of Monopolistic Competition, , 15.2 Short-run Equilibrium of the Firm, , 15.3 Long-run Equilibrium - Group Equilibrium, 15.4 — Selling Cost and its Effects, , 15.5 Role of Advertisement, , a ES, , We are, by now, familiar with two different forms of markets i.e perfect, , competition and monopoly. The first is more of a theoretical model which, , helps us understand the functioning of a firm under certain conditions, , and also derive some set of principles which could be used as guidelines, , for the operation of a business firm even in a real market situation., , Monopoly, in its pure form is also most uncommon, yet in its loose form it, does exist. When the market exhibits the characteristics of both competition, and monopoly the market becomes monopolistically competitive. In this, form of market there are many producers selling a commodity in which, the producer has a monopoly market to a certain extent but at the same, time has to compete with rivals who produce a close substitute. For example,, atextile firm like Bombay Dyeing may acquire a monopoly market for its, products due to the brand loyalty developed by the consumers. However,, such monopoly power cannot lead to complacency and relaxation on the, part of this firm. Such an attitude may help the rivals to increase their, market share. Therefore, though a firm has a certain degree of monopoly, power yet at the same time it must be alert and compete with its rivals., Such a situation turns the market into monopolistic competition as described, by Prof. Chamberlin. Prof. Joan Robinson, however desctibed this situation, as imperfect competition as the market does not have the conditions, required for perfect competition.

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Many Sellers, Market, h, , Perfectly, the mark, , Olicy i i ., ~ ay w Price and output matters without disturbing others. Thereig, PParent interdependence between the sellers, therefore it is, , : There are many sellers in a monopolistic competitive, ©wever the number is not large enough to make the market, Competitive. A single seller is not big enough to influence, et. Each one may to a certain extent follow an independent, , Possible f, , action, Te. an individual firm to pursue an independent course of, , competi he impact of such actions is not seriously felt by the, exa: : neers Garment, soaps, cosmetics, restaurants are some of the, mples of monopolistic market., , i erentittite Products : Products sold by the sellers in, ane aie competition are close substitutes, Soaps and garments, brand of Ples where there are many close substitutes for any given, , of product. However they are not perfect substitutes as in perfect, , oo Being close substitutes the cross elasticity of demand is, , Product Differentiation : Products in monopolistic competition are, differentiated. Being close substitutes it becomes essential to have an, independent identity of its own. In products like pant lengths, shirt, pieces, dress pieces there are many varieties. They are close substitutes, and each brand of product differentiates itself. Products differ from, each other in many ways. Differentiation is evident in the form of, brand name, for example textile products or any other product carrying, its company’s or some other brand name, trade mark etc. which, distinguishes a given product from other similar products. Besides, the brand name a product is differentiated in terms of colour, size,, design, taste, perfume, etc. The above mentioned characteristics can be, seen in textiles, soaps, confectioneries and such other products. Good, salesmanship and better aftersales service also bring in a differentiation, in the product sold. These external signs differentiate the products, from each other. Such a distinction also leads to the development of, brand loyalty on the part of the consumers, which enables the seller, , to acquire a certain degreé of monopoly power., , Selling Costs : Firms in a monopolistically competitive market, promote sales by incurring selling cost. Selling cost includes all types, of costs incurred to promote sales. Selling cost is usually incurred in

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233, , ings, press,, the form of advertisement - T.V., broadcast, hoa ie products, exhibitions, window advertising, gifts of so {ditional discount, alongwith the main products, free samples, etc. Aa, , E h discou nts, offered to the retailers is another form of selling oe ae Selling cost, are the incentives to the retailers to promote that produc, , : A es., tries to influence consumers’ demand and promote sal, , Monopolistic Competition, , 5, Free Entry and Exit : A firm is free to enter the market 1° - ee, a product which is usually a close substitute for the existing Ticies or, Entry of a new firm is not restricted through government . tions if a, through any other methods. Similarly, there are no restric TS, firm wants to exit from the market for any reason. ee tices will, the existing firms will attract more firms to the market pues and exit, compel the firm to leave the industry or group. Free entry, , will enable the remaining firms earn only normal profit in the longrun., , 6. Nature of Demand Curve : Demand for products of Se eau a, downward sloping and comparatively more elastic. And ‘ts old, firm can sell more by reducing the price. Demand for grog ae, by monopolistically competitive firm is elastic. It is not pe eye - :, as in the case of perfect competition where commodities are en, substitutes. Its elasticity is also not very low like in monopoly where, the product ‘has no close substitutes. The demand curve of a, monopolistically competitive firm is shown in Fig. 15.1., , Y, , Bt”, , Price, , O Quantity Demanded, Fig. 15.1, , Fig. 15.1 shows the nature of demand curve of a monopolistically, competitive firm. Availability of large number of close substitutes makes, the cross elasticity high and demand more elastic., , Having understood the features of monopolistic competition let us discuss, the equilibrium of the firm both in the short and long-run.

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234, Business Economics - I (BMS, BAF, BEM, BBI.: sane -D), , , , , , A firm’s 5, following, , (i), (ii), , hort- ‘ i, ort-run equilibrium can be discussed on the basis of the, assumptions, i, , A firm is tat; ., § rational ie. it tries to maximise profit., , It oper, Perates under U shape average cost curve., , (iii) The demand Curve for the firm’s product is downward sloping i.e. its, , Price and quantity sold are inversely related., , iy) Ss ;, (iv) N wma variation in its product ie. the firm does not introduce, €r variations or differentiation in its product., , With t _ ’, whi he above assumptions, a firm tries to produce that quantity of output, , i, , Fen eatin its revenue or minimises its loss. In the short-run the, , call ee operate with (1) excess profit; (2) normal profit and (3) loss. We, cuss the cases of excess profit and loss and not the normal profit, as, , such a situation is not very likely in the short run., , EXCESS PROFIT, , , , , , , , , , , , Yt, yo, s, S, 3 P, me, og ~N, zg, So .,, “MR, oO Q > Xx |, Output, Fig. 15.2, , In Fig. 15.2, given the demand and cost conditions, the firm would produce, its equilibrium output at a point where its MC = MR and MC is increasing., The total output is OQ. With OQ output and the given demand (AR) line,, the price determined by demand and supply is OP. OP is the price-which, gives the firm the maximum profit. Any increase in price may turn the, customers to other substitutes. The decline in demand due to increase in

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we” 235, Monopolistic Competition, , price Will reduce the total revenue. Lowering the price me y, additional customers, diverting them from the rivals., additional quantity sold may not be enough to bring im T, is enough to compensate the loss due to decrease in Price:, the price which brings maximum possible revenue., , Total Revenue = Price x output = OQ x OP = OQMP, Total Cost = Average Cost x Output = QS x OQ = OQSN, , profit = TR = TC = QQMP - OQSN = NSMP, , The output, price, revenue and profit of the firm can be stated as:, Output = OQ TC = OQSN, Price = OP TR = OQMP, Profit = NSMP, , The firm earns excess profit., , SHORT-TERM EQUILIBRIUM WITH LOSS, , A ‘ olistic, Demand and cost conditions may require a firm under monop, , competition to operate with loss. The position of a loss incurring, firm is, shown in Fig. 15.3., , , , , , , , , , , , , , z, o, s, ec, x, oe, s, =, : 7 AR, x Se, ~MR >, O Q xX, Output, Fig. 15.3, , In Fig. 15,3 the position of SAC is above the demand (AR) line. The position, of the firm can be explained as :, , Output = OQ Price = OP, acm Re TC = OQ = QH = OQHG, TR = OQ~x OP =OQNP . Loss = PNHG