economics micro monopolistic competition

A number of industries in the uk are said to operate under conditions of monopolistic competition. Monopolistic competition with its focus on a large number of producers is a realistic model of market competition. Evaluate using an appropriate diagrams the advantages to the consumer of monopolistic competition.

Reply 1

EleaB

Original post by vova_priv07

Not sure how many marks this question is, but I would probably go for:

Define monopolistic competition in an industry. If it's a 25 marker, use real world context such as restaurants or hair salons, and add a conclusion.

1. As there is low barriers to entry with high competition in the market -> firms are incentivised to produce more efficiently to compete against other firms in the industry to lower prices of their goods -> consumers can enjoy higher quality goods and lower prices as firms compete to have higher market share and consumer loyalty. This can be supported by a short-run monopolistic diagram with supernormal profits.
Evaluation: Large competition may only happen in the short run as firms engage in 'hit and run', which is when firms enter with the incentive of supernormal profits but leave after it runs out. In the long-run, monopolistic firms will be earning a normal profit only, with less or no dynamic efficiency to reinvest into improving goods. (But allocative efficiency will be achieved as price is set at AR=AC, which is when normal profits are made.)

2. Lots of suppliers within the industry, so consumers have a wide variety of choice of the same type of products -> they generally have a vast knowledge of prices and quality of goods due to that -> no information gap as there is perfect knowledge within the market -> producers can't exploit consumers in term of prices and consumers have the ability to quality-check goods to make sure they're not being cheated.
Evaluation: Sometimes because of brand loyalty, it's easier for firms to exploit consumers as they consumer those goods out of habitual behaviours (Behavioral economics).

3. In the long-run, some monopolistic firms (e.g. clothing shops) may still be dynamically efficient as they reinvest their normal profits into R&D. This is because clothing shops need to keep up with new fashion trends, making it necessary for them to keep investing into products. For consumers, this means that they will continue to benefit from quality of goods despite the firm's loss of supernormal profits.
Evaluation: Less economies of scale for firms as they produce differentiated goods, lose out on e.g. technological / marketing / managerial economies of scale as goods aren't homogenous. That means a higher AC for firms and a narrow profit margin, some firms may even reach the shut-down point where AC > AR in the long-run, which leads to less choices for consumers as firms exit the market.

I would only write 2 main points in my essay plus evaluation for each, but hope this helps. Better for you to fact-check everything in case I got something wrong.

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