Mini Essay

Edward H.
Chamberlin and Joan Robinson separately developed the most frequently utilized
monopolistic competition model in the 1930s. It combines parts of monopoly and perfect
competition theory, as the name indicates. The monopolistically competitive company, like a
monopolist, is a price seeker with a negatively sloping demand curve. At the same time, the
monopolistic rival, like a fully competitive firm, shares its market with a slew of other tiny
businesses. The monopolistic competition model ignores oligopolistic interdependence since
there are so many companies. It is assumed that each business in the market is so little that none
of them has a major impact on the actions of the others.
Markets with a large number of tiny companies, each of which produces a product that varies
from its rivals in at least some aspects, are referred to as monopolistic competition. Restaurants,
service stations, bakeries, some sorts of publishing firms, and many more are examples.
Monopolistically Competitive Industries' Performance The long-run equilibrium position
depicted in Figure 12.3 was argued by early proponents of the monopolistic competition model
to reflect inadequate market performance. One explanation is that, like with pure monopolies,
each company falls short of the output level that maximizes the sum of producer and consumer
surplus. Furthermore, the price-to-marginal-cost difference indicates that producing more would
benefit both the company and its consumers. Finally, under monopolistic competition, a business
does not function at its long-run average cost curve's lowest point. The industry might supply the
same number of items at a lower overall cost if there were fewer businesses, each producing a
higher amount of production. According to this logic, monopolistic competition leads to an
excess of gas stations, supermarkets, and restaurants, all of which operate at less than full
capacity and charge inefficiently high rates. Despite the high pricing, everyone makes just the
standard return on capital required to continue in business, not a pure economic profit. The
difficulty with this assessment is that it undervalues the product diversity that monopolistic
competition is known for. It's irrelevant to argue that costs would be a bit cheaper if there were
fewer barbershops, each little less handy; fewer supermarkets, each slightly more crowded; or
fewer ice cream varieties, even if some people couldn't get their favorite. Would a shift in that
direction be beneficial to customers? Not always, if customers are prepared to pay a premium for
diversity. In addition, the monopolistic competition model implies that each business uses simple
monopoly pricing. In practice, monopolistically competitive companies have access to the same
price discrimination and two-part pricing techniques as monopolies and oligopolies. As
discussed in the last chapter, these techniques enhance market performance by bringing output
closer to the point where marginal cost and marginal income are equal. When everything is said
and done, the current perspective is that monopolistic competition and perfect competition are
not that unlike, and that both provide adequate service to customers.
Figure 12.3 depicts a typical firm's short- and long-run equilibrium positions under monopolistic
competition. Because each firm's product differs somewhat from its rivals', the demand curve has
a negative slope. Because at least some consumers care about distinctions in design, location, or
other marketing benefits, each company may raise its price by a little amount without losing all
of its customers. The short-run profit-maximizing stance illustrated in Part (a) of the figure
appears very much like that of a simple monopolist, thanks to the downward sloping demand
curve. The intersection of the marginal cost and marginal revenue curves determines the
equilibrium level of output, and the price is determined by the height of the demand curve at that
level. This short-run equilibrium, however, cannot also be a long-run equilibrium under
monopolistic competition. This is because monopolistically competitive marketplaces are highly
contestable, with easy entry and exit. In the short-run situation shown in Part (a) of Figure 12.3,
the price exceeds average total cost, and the firm achieves a pure economic profit. Profits attract
new businesses, and when new businesses arrive, two things happen. First, current businesses'
demand curves move downward, owing to the fact that the new firms' goods, while not identical
to those of the original firms, are near substitutes. Second, companies that are already in the
market may increase their advertising, enhance their product in some way, or take other efforts to
reclaim consumers in reaction to the new competition. The average total cost curves of the
businesses change upward as a result of these efforts. The downward change in the demand
curves of the original businesses, or the upward movement in their cost curves, or both, continue
until no more profits are available to attract new enterprises. The long-run equilibrium position
illustrated in Part (b) of Figure 12.3 is the outcome.
There are no obstacles to entry for new businesses in monopolistic competition since each firm is
a price seeker with a negatively sloping demand curve. A company that produces at the point
where marginal cost equals marginal FeVENUE is referred to as a "marginal cost equals
marginal FeVENUE" enterprise. As seen in Part 1, you may make pure economic profits (a). In
the long term, new businesses are drawn to the market, diverting some demand away from
existing enterprises and lowering the demand curve for each. Furthermore, those businesses may
use cost-increasing tactics to maintain their market dominance. As illustrated in Part 1, new
businesses will continue to enter the market until the market finds a long-run equilibrium where
pure economic profit vanishes (b).
How does monopolistic competition attain equilibrium, and how well do such markets perform?
At the production level where marginal cost equals marginal revenue, a monopolistic competitor
maximizes profit. In the long term, competition in this industry leads to an equilibrium where
each firm's price matches its average total cost. Price does not equal marginal cost in that
equilibrium, and production does not occur at the point of lowest average total cost; nonetheless,
customers gain from product variety.

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Edward H.

businesses. The monopolistic competition model ignores oligopolistic interdependence since

of them has a major impact on the actions of the others.

Monopolistically Competitive Industries' Performance The long-run equilibrium position

higher amount of production. According to this logic, monopolistic competition leads to an

price discrimination and two-part pricing techniques as monopolies and oligopolies. As

monopolistic competition. This is because monopolistically competitive marketplaces are highly

illustrated in Part (b) of Figure 12.3 is the outcome.

pure economic profit vanishes (b).

customers gain from product variety.

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