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Price Determination under Monopolistic Competition.docx

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Michael H O

Home Price Determination under Monopolistic Competition Price Determination under Monopolistic Competition Imperfect competition covers all situations where there is neither pure competition nor pure monopoly. Both perfect competition and pure monopoly are very unlikely to be found in the real world. In the real world, it is the imperfect competition lying between perfect competition and pure monopoly. The fundamental distinguishing characteristic of imperfect competition is that average revenue curve slopes downwards throughout its length, but it slopes downwards at different rates in different categories of imperfect competition. The monopolistic competition is one form of imperfect competition. FEATURES OF MONOPOLISTIC COMPETITION: Monopolistic competition refers to the market situation in which many producers produce goods which are close substitutes of one another. Two important distinguishing features of monopolistic competition are: (a) Product differentiation, and (b) Existence of many firms supplying the market. (a) Product Differentiation: In contrary to perfect competition where there is only one homogeneous commodity, in monopolistic competition there is differentiation of products. In monopolistic competition, products are not homogenous nor are they only remote substitutes. These are the products produced by competing monopolists that have separate identity, brand, logos, patents, quality and such other product features. Product differentiation does not mean that goods are completely different. Rather it means that products are different in some ways, but not altogether so. These imaginary differences are created through advertising, marketing, packaging and the use of trademarks and brand names. (b) Existence of Many Firms: Under monopolistic competition, there is fairly large number of sellers, let say 25 to 70. Each individual firm has relatively small part of the total market so that each has a very limited control over the price of the product. And each firm determines its own price-output policy without considering the reactions of rival firms. (c) In monopolistic competition, in the long run, there is freedom of entry and exit. (d) The commodity sold in a monopolistic competitive market is not a standardised product but a differentiated product. Hence competition is no longer exclusive on price basis. Buyers are buying a combination of physical product and the services which go with it. (e) Because of consumers’ attachment to a particular brand, the seller acquires a monopolistic influence on the market. Thus, the demand curve facing a firm under
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