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Monopolistic competition is the market structure in which there is keen competition, but neither perfect nor pure, among large number producer or supplier. Monopolistic competition is the mixture of perfect competition and a certain degree of monopoly. Monopolistic competition lies between two extreme points’ perfect competition and monopoly.
Characteristics of monopolistic competition:
large no of seller
Product differentiation: it is the distinguish feature of monopolistic competition, that product of each seller is branded and identified.
A firm has limited degree of control over the market as relatively small percentage of total market is shared by the individual firm.
large number of buyers
there is free entry of firms
two dimensional competition
non- price competition
negative sloping demand curve: firms demand curve (or AR curve) slopes downward to right
Price competition occurs when firms compete by selling identical or similar product. Seller compete each other on the basis of lowering the price. Price competition happens mainly in three types of market monopolistic, duopoly & oligopoly. The other two types of market does not compete with price because in monopoly the firm is equal to industry hence it decides the price of product where as in perfect competition the price is decided by the market and an individual cannot affect the price of the product.
Price elasticity of demand in different market with respect to market
- Monopolistic market: the demand elasticity in monopolistic competition is highly elastic in long run. Because a slight change in price may change the demand of product in long run.
- Oligopoly: there are only few sellers in the market which does not affect the market. Therefore the elasticity of demand is relative elastic in this type of market.
- Duopoly: there are only two sellers in the market which does not affect much of demand therefore the demand is relative elastic.
CROSS PRICE ELASTICITY OF DEMAND:
Cross price elasticity measure the responsiveness in the quantity demanded of one good to change in the price of another good.
Substitute has positive cross price elasticity. It exist in monopoly, duopoly and oligopoly as the product are close substitute to each other in the market and there is slight change in the price of the product will increase the price for another product.
NON PRICE COMPETITION: non-price competition depends on making a product different from those of competitors and by giving it distinctive qualities that are valued by the target HE market. These might include branding, styling, special features or higher levels of customer service. Such factors can allow a premium price to be charged while still offering target customers Competitive value-for-money.the firms are engage in non price competition, the most prominent form being advertising.
The market which is affected by non price factors is monopolistic competition and oligopoly. This happens because most firms are engaged in non price competition in spite of the additional cost involved, because non price factors usually more profitable than selling for a lower price and avoid the risk of a price war.
NON PRICE FACTOR AFFECTING DEMAND
- Income of the consumer
- Price of related goods
- Change in taste of consumer
- The expectation of buyer may change
- Change in the number of buyer.
NON PRICE FACTOR AFFECTING SUPPLY
- Change in the input cost
- Change in the technology
- Change in expectation of consumer
- Change in the number of seller.
NON PRICE COMPETITION AND ITS EXISTANCE
PERFECT COMPETITION: all the products are homogenous in nature & there is no point of non-price competition as it will not make a difference.
MONOPOLY: there is only one producer in monopolistic competition thus the concept of non-price competition does not apply.
In Monopolistic competition & oligopoly non-price competition is applicable.
Product differentiation: a situation where a producer or firm tries to win over the market or increase its market share by adding certain features to the product so that it becomes different form the other products.
Features of product differentiation.
Technical standards-this refer to the aspect s to how advance is the product in terms of the current state of technology. For example if you’re purchasing PC then this point would play a very vital role in the consideration.
Quality standards- this refers to the quality of raw material used in the product whether it be related to the manufacturing r the assembling if the product, as this directly effects the durability if the product and therefore its usefulness and life. Therefore the quality of the product plays a very important role in non-price competition.
Design standards-it refers to the overall structure of the product that is provided in the market by a customer. This can play a vital role in attracting the customers. As the product provided has to be aesthetically good. Thus the producers can try and make a better design standard of their product.
Service standards-this point generally refers to the after services given to the customers after the purchase has been made them and thus if the after sales provided to a customer is good by any company then the level of satisfaction also will be high.
Advantages of non-price competition
- The quality of the product is in focus which helps companies to become unique and diffentiate from other rival companies.
- The design and distinguishing features of goods and services offered in the marketplace matches the demand and needs of the people in that area.
- The location of distribution for targeted customers is given importance. Goods reach buyers matching their own convenience and needs.
- Offers innovation like on-line shopping. Good for people that just stop during meals and sleep
- Marketers think “out of the box” in order to attract customers to be interested in what they are offering instead of their competitor.
Types of product differentiation:
- Vertical product differentiation- this can be defined as “where a product differs from the product that its rival firm produces in terms of quality.”
- Horizontal product differentiation- this can be defined as “when a product differs from the rival’s products, although the quality of the product seems to be of the similar nature.
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