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Characteristics of Monopolistic Competition

Instructor: Brianna Whiting

Brianna has a masters of education in educational leadership, a DBA business management, and a BS in animal science.

Competition is what makes the business world thrive. In this lesson we will learn about one type of competition known as monopolistic competition. We will learn about the characteristics and how a business might be affected now and in the future.

A Beginning Look at Monopolistic Competition

Meet Betty! Betty owns a business that makes homemade soap from goat's milk. When she first started her business, she mainly sold to friends and family. However, her business has grown so large that she now has a shop and an online store. In the beginning, Betty served most of the customers in a large area because she was the only one to carry the product.

However, when people started to realize how moisturizing goat's milk soap is, many other shops started popping up. This did not worry Betty, because she was able to distinguish her product from the rest with her top ingredients. Although there were similar products, none of them could take the place of her rich goat's milk soap. This trait is just one of the characteristics often found in a monopolistic competition, which we will learn about in this lesson.

Basic Characteristics of Monopolistic Competition

Let's start by explaining what monopolistic completion is by looking at its characteristics.

1. It is a type of competition between others in the industry. This means more than one company is selling a similar product and competing in that market.

2. Everyone offers a similar product, but that product cannot be completely substituted. In other words, while other companies may sell goat's milk soap, none of them are exactly like Betty's soap because they do not contain all of the exact same ingredients.

3. All companies can enter or leave the industry when they want to. This means companies can enter in and sell goat's milk soap when they think they can make money doing so. And, they can leave if they think there is no longer a market for the product.

4. Every company makes their own decisions about their products. So, they decide what price to sell their soap at and how many to make and sell. Because there is such a demand for goat's milk soap, Betty keeps a steady supply.

5. There is product differentiation, which means that companies try to distinguish or differentiate their products from others in the market so that their product is more enticing to customers.

a. Physical differentiation -- shape, color, design, and size are just a few ways a company can make their product different.

b. Marketing differentiation -- This is where a company tries to advertise their products by using unique packaging or promoting their product in a distinct way. For example, Betty might advertise her product as special and of great value because it contains ingredients that will make your skin smooth even during dry winter months.

Equilibrium

Betty knows that there are many characteristics of a monopolistic competition. But what she still needs to learn are the effects of equilibrium in the short and long run. In other words, she needs to understand what may happen to her business as the market grows or if there is no longer a high demand for goat's milk soap.

Short Run-- Initially, Betty experienced very high profits known as supernormal profits. This is because she had a product that everyone wanted and only she carried it. Everyone was turning to her to purchase goat's milk soap, creating profit maximization.

Long Run-- However, as more people began to realize that there is a market for goat's milk soap, more and more businesses began to start selling the product.

Risk Factors with Monopolistic Competition

Keep in mind that one problem with a monopolistic competition is that in the long run, a company may experience excess capacity. This is because companies will continue to create or output a high amount of product to keep up with demand and to keep the costs of production low. But, as more companies begin to offer the product, the demand may not be as high because a consumer can purchase the soap from a variety of places. This creates excess because companies are creating more product than is actually needed.

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