Another type of market structure is Monopolistic Competition, which is very realistic in nature. In this market, there are some features of monopoly and some features of perfect competition acting together. This mixture of two markets gives birth to a new form of market known as Monopolistic Competition, Prof. E.H. Chamberlin coined this concept in his book, "Theory of Monopolistic Competition" which was published, in 1933.
5.6 Monopolistic Competition – Definition and its Features
Definition : According to Chamberlin, "Monopolistic competition refers to competition among a large number of sellers producing close but not perfect substitute."
"When markets, which have a large number of producers producing differentiated products which are close substitute to each other, engage in non price competition, we call it as a Monopolistic Competitive market."
Features:
1. Fairly large number of buyers
2. Fairly large number of sellers
3. Product differentiation
4. Close substitute
5. Selling cost
6. Free entry and exit
7. Demand curve of the seller
8. Concept of group
1. Fairly large number of buyers
In this market, there are fairly large number of buyers. Consequently, no single buyer can influence the price of the product by changing his individual demand.
2. Fairly large number of sellers
The number of sellers in a monopolistic competition is large. It is still smaller than that in a perfectly competitive market. Since the number of sellers is large. Each seller has a limited control over supply. The seller has complet control over his brand. This control is possible because of patents, trade mark, copyrights etc., that the producer possesses. Thus, each producer enjoys an element of monopoly on one hand and on the other they have to face competition from sellers selling close substitute in the market.
3. Product differentiation
The most important feature of Monopolistic Competition is product differentiation. Each product in-this market is different from other product in some form or the other. The differences could be in its colour, shape, wrapper, after - sales services etc. Their products, though different, are close substitute to each other e.g., Hamam soap is close substitute to Lux soap. Producers also adopt various techniques such as discounts, gifts, advertisements etc. to attract the consumers. This is known as product differentiation. In this market producers compete with each other on the basis of product differentiation and not on the price differentiation. Therefore, Monopolistic Competition is also known, as 'non-price competition.
4. Close Substitute
In Monopolistic Competition goods have close substitute to each other. For e.g. Goldspot is close substitute to Limca.
5. Selling cost
The uniqueness of this market lies in the fact that a difference is made between cost of production and selling cost. Product differentiation leads to emergemce of selling cost. Thus, the cost that producer have to incur, in order to differentiate their product is known as selling cost. Hence, medium such as television, radio, newspaper, magazine, exhibitions, incentives and salaries of sales representatives etc., are used by firms to increase the sales. The price of the product includes cost of production as well as selling cost.
6. Free entry and exist
Under Monopolistic Competition, there is freedom of entry and exit i.e.. new firms are free to enter the market, if there is super normal profit. Similarly, they can leave the market, if they find it difficult to survive.
7. Demand curve of the seller
Due to product differentiation and availability of close substitute, demand curve is highly price elastic and downward slopping.
It means a slight change in price of the product will bring about a change in quantity demanded.
8. Concept of group
Chamberlin introduced the concept of group as the substitute for industry concept. The firm producing identical product, are clubbed together in one industry under perfect competition. However, in the Monopolistic Competition the products are differentiated. All the firms producing close substitutes are taken together in a 'group concept'. For example – group of firms producing medicines, cement etc.