Monopolistic competition – a description of the market model

Economic research uses four basic models to study market situations. Data models-pure competition, pure monopoly, monopolistic competition and oligopoly. It should be noted that the first two situations are ideal, that is, if their consideration is necessary to abstract from some of the circumstances inherent in the real markets. Monopolistic competition is more realistic reality, therefore her study is more appropriate. About it and we will discuss in this article.

Monopolistic competition – is a market situation in which the following conditions are true: there are many buyers and sellers, sold a differentiated product (that is, offer products similar to each other but have distinctive features), there are negligible barriers to entry on the market and sellers are no opportunities to work together. In contrast to the ideal model of pure competition (which has an infinitely large number of buyers and sellers, there are no market barriers and the product is completely homogeneous), the monopolistic competition model more realistically reflects the situation in most cases, especially if we're talking about a group of FMCG - consumer.

Understanding this model is best comes when considering example. Let's try to prove that the market of household chemicals, there is monopolistic competition. Take washing powder.

So, there are a large number of manufacturers of these products for both domestic and foreign. Trade marks under which sold washing powder, there is even more. In addition, each manufacturer tries to give his product some characteristic features (aroma, presence of special additives, the packs of different sizes and so on) - there is differentiation. In order to enter the market of washing powder as a manufacturer, you need to make the cost of purchasing equipment, hiring staff and obtaining permits, if the entrepreneur wants to act only as a reseller, he need only issue the necessary papers, hire workers and organize point of sale.

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Thus, high barriers to market entry there, because there is no need to obtain special licenses, permits and other papers that would need to be, for example, for the production of weapons. In addition, due to the fact that sellers in the market quite a lot, they have no opportunity in any way to unite and to establish a joint pricing policy – thanks to this, price becomes the most important tool for a competitive game and enables with its reduction to entice consumers. If this market was oligopolistic, all the sellers could enter into an agreement and set unreasonably high prices, which consumers would be forced to agree, simply because they would have no alternatives.

Monopolistic competition is a more efficient market structure for buyers, while the oligopoly is more advantageous to the sellers, although it has its own peculiarities in terms of pricing-if sellers are not colluding, they will have to closely monitor each other's actions and react to changes in pricing policies of competitors. In economic terminology, the chain of reactions is called a game, consisting of separate moves.

Among all models monopolistic competition is often found on the consumer products market as our country and others. I hope that this article has helped our readers to understand the peculiarities of structure and functioning of the market of monopolistic competition.