Monopolistic Competition - Term Paper Example

Monopolistic Competition Thesis ment: Monopolistic competition, as argued by scholars describes a common market where a firm experiences many competitors with similar goods though each having a different perspective of market control, and further advocating free entry and exit. I. Characteristic of monopolistic competition A. Large number of small firms B. Similar products C. Relative resource mobility D. Selling cost II. Impacts of monopolistic competition A. Advantages of monopolistic competition a) Creation of diversity, and choice of products b) Product quality B.

Disadvantages of monopolistic competition a) Lack of expected utility b) Inefficiency Research depicts that monopolistic competition as a common model of competition characterizes itself with a range of factors that include very many small firms within a common market posing relative competition (McEachern 226). This ensures minimal control of the prices or quantity of goods. Since the firms sell differentiated products, competition becomes very stiff and this results to sellers producing a small amount of the market supply.

In monopolistic competition, sellers sell similar but not identical products. This means that the firms always provide close substitutes of their goods to satisfy same needs and wants of the buyers. This similarity is obtained due to product differentiation portrayed either physically, by perception, or by support services. Most importantly, customers view these goods as similar since they serve the same purpose. Monopolistic competition advocates free entry into market and free exit. This enables new firms to come up with close substitutes thus enhancing competition.

In a free market, a firm faces no restrictions from the government rules, financial start-up, or other considerable barriers. Additionally, free entry and exit in the market maintains profit maximization of a firm for a longer span of time. Selling price is a unique characteristic in monopolistic competition (Baumol 11). A firm is ever independent in decision-making. Each firm decides on commodity price and output. The seller sets the price of a good depending on circumstances. These variations of price arise due to product differentiation and other additional expenditures.

Scholars assert monopolistic competition to have both negative and positive impacts to in the common market. The optimistic impacts of monopolistic competition include creation of diversity, choice, and utility of products. This enables an individual in making choices and definite decisions on the commodity to purchase. Monopolistic completion leads to invention and innovation of new products in the market. Due to stiff competition, vendors constantly come up with new and better ways of attracting customers.

Product quality is another advantage of monopolistic competition since sellers improve their products to attract customers. This enhances production of high quality brands of the product. Economists argue that the quality of a commodity attracts consumer’s tastes and earns the seller trust and reliability from the consumer. Although monopolistic market manifests some advantageous impact to the market, it poses pessimistic impacts that include lack of utility. Some differentiations in a monopolistic competition lead to waste of commodity rather than its beneficial implication (Arnold 206).

This occurs for example when a seller uses excess packaging or even a lot of expense in advertising for goods, which in most cases portray informative message rather than persuasive message. Inefficiency displays itself as another disadvantage of monopolistic competition. Sellers in a monopolistic competition concentrate on maximization of profits. This is realized through selection of an output where both marginal cost and marginal revenue are equal (Arnold 206). At this point, the seller charges the highest prices possible as shown through the model of monopolistic competition below.

Web 7 March 2012. http://ingrimayne.com/econ/International/Figure16.2.gif Since monopolistic competition involves many firms, mass production of goods becomes a problem to the vendors. Firms, therefore, lack an opportunity to exploit their fixed factors thus leading to excess capacity. This causes inefficiency of the firm. Though the market exhibits different types of competitions, monopolistic competition has diversified in the market. Following the argument on unrestricting factors and its advantages, many merchants in commonplace markets have opted to go for this kind of competition (Baumol 222).

Work Cited Arnold, A. Roger. Microeconomics. New York: Cengage Learning, 2006. Print. Baumol, J. William and Blinder, S. Alan. Economics: Principles and Policy. New York: Cengage Learning, 2011. Print. McEachern, A. William. Economics: A Contemporary Introduction. New York: Cengage Learning, 2011. Print.