This document summarizes the key aspects of monopolistic competition. It was prepared by Dipak Mer and Swati Parmar for MK Bhavnagar University. The founding theorist of monopolistic competition was Edward Chamberlin, who described it in his 1933 book. Monopolistic competition involves many producers selling differentiated but substitutable products. Firms have some degree of market power but also face competition. In both the short and long run, firms will adjust output and prices to maximize profits or minimize losses. The model of monopolistic competition is compared to perfect competition, with outcomes including excess capacity and markups over marginal cost under monopolistic competition.

1.  Prepared By :
Dipak Mer (05)
Swati Parmar(06)
Guided BY :
Dr. J.P.Majumdar
 Submitted to :
M.K.Bhavnagar University,
Department of business administration,
Bhavnagar.

4. The "founding father" of
the theory of
monopolistic competition
was ”Edward Hastings
Chamberlin” in his
pioneering book on the
subject Theory of
Monopolistic
Competition (1933).

5.  Monopolistic competition is a type
of imperfect competition such that many
producers sell products that
are differentiated from one another as goods
but not perfect substitutes such as from
branding, quality, or location.
 For example like soft drinks, soaps, books
etc….

6.  There are six characteristics of monopolistic
competition (MC):
 Product differentiation
 Many firms
 Free entry and exit in the long run
 Independent decision making
 Some degree of Market Power
 Buyers and Sellers do not have perfect
information (Imperfect Information)

7.  In this we consider the decision phasing an
individual firm.
 Then we examine what happens in the long run
as firms enter and exit the industry.
 There are two types equilibrium in this market
i.e.
1. Short – run
2. Long – run

8.  The monopolistically competitive firm maximizes
profit or minimizes loss in the short run. It
produces a quantity Q at which MR = MC and
charges a price P based on its demand curve.
 When P > ATC, the firm earns an economic profit.
 When P < ATC, the firm incurs a loss.

11.  If firms are making profit in short run new firms enter in
the market.
 In the long-run they will make losses, and tends to
leave the market.
 So the demand curve for existing firms shifts to the
right.
 In the long-run equilibrium P=ATC and the firms earns
zero profit.

13. MONOPOLISTIC V/S PERFECT
COMPETITION
There are two differences in the comparison of
monopolistic and perfect competition market.
1. The perfectly competitive firm produces at the
efficient scale where average cost is minimize
when monopolistically competitive firm
produces at less than efficient scale.
2. Price = marginal cost under perfect competition
but price is above marginal cost under
monopolistic competition.
3. Two outcomes of comparison i.e. 1 Excess
capacity 2. Markup over marginal cost

14. Quantity0
Price
Demand
(a) Monopolistically Competitive Firm
MC
ATC
MR
Efficient
scale
P
Quantity
produced
F
P=MR
(ddcurve)
P=MC
Quantity0
(b) Perfectly Competitive Firm
MC
ATC
Quantity produced =
Efficient scale

15. Outcomes
1. Excess Capacity
• There is no excess capacity in perfect
competition in the long run.
• Free entry results in competitive firms producing
at the point where average total cost is
minimized, which is the efficient scale of the
firm.
• There is excess capacity in monopolistic
competition in the long run.
• In monopolistic competition, output is less than
the efficient scale of perfect competition.

16. 2. Markup over Marginal Cost
• For a competitive firm, price equals marginal
cost.
• For a monopolistically competitive firm, price
exceeds marginal cost.
• Because price exceeds marginal cost, an extra
unit sold at the posted price means more profit
for the monopolistically competitive firm.

17. Monopolistic Competition
& the Welfare of Society
There is the normal deadweight loss of
monopoly pricing in monopolistic competition
caused by the markup of price over marginal
cost.
However, the administrative burden of
regulating the pricing of all firms that
produce differentiated products would be
overwhelming.

18.  When firms sell differentiated products and charge
prices above marginal cost, each firm has an
incentive to advertise in order to attract more
buyers to its particular product.
 Firms that sell highly differentiated consumer
goods typically spend between 10 and 20 percent
of revenue on advertising.
 Overall, about 2 percent of total revenue, or over
$200 billion a year, is spent on advertising.

19. 1. The Critique Of Advertising.
• Critics of advertising argue that firms advertise
in order to manipulate people’s tastes.
• They also argue that it impedes competition by
implying that products are more different than
they truly are.
• Advertising makes buyers less concerned with
price differential.

20. 2. The Defense Of Advertising.
•Defenders argue that advertising provides information to
consumers. This information allows customers to make better
choice about what to buy.
•They also argue that advertising increases competition by
offering a greater variety of products and prices.
•Advertising allows new firms to enter more easily because it
gives entrance a means to attract customers from existing
firms.
The Debate over Advertising

21. Advertising As A signal of
Quality
•The willingness of a firm to spend
dollars on advertising can be a signal
to consumers about the quality of the
product being offered.

22. Advertising is closely related to the
existence of brand names. In many markets,
there are two types of firms. Some firms sell
products with widely recognized brand
names, while other firms sell generic
substitutes.
For Example, In a typical grocery
store, you can find THUMPS UP next to less
familiar colas.

23. •Critics argue that brand names cause
consumers to perceive differences that do not
really exist.
•Edward Chamberlin conclude from this
argument that brand names were bad for the
economy.
Critics view

24. Economists have argued that brand names
may be a useful way for consumers to ensure
that the goods they are buying are of high
quality.
•providing information about quality.
•giving firms incentive to maintain high
quality.
Economist view

25. QUERIES…?

26. Thank
you