Monopolistic Competition Market Structure Essay
In any given economy or economies, different market systems tend to be observed. Some of these market structures market structures exist exclusively while others do co-exist alongside each other. Some of these market structures are perfect competition, monopolistic competition, oligopolies and monopolies. An article on monopolistic competition will be analyzed in detail. The article shall then be compared and contrasted with the theoretical assumptions relating to the particular market structure. Policy changes, if any will be analyzed and the effect of the changes in both the long run and short run discussed and finally the advantages and disadvantages relating to the policy changes will form the conclusion.
An article must be reviewed and in this particular case study article will be taken. It has been noted that it is mostly household items that include beauty items, cleansing items, body care products as well as general loose tools items are most recognized through their production firms as monopolistic competition. Detergents for example cannot be manufactured by a monopoly but various firms and companies can undertake its production.
This is the major reason why such products usually undergo intensive marketing, advertising, branding and packaging in order to differentiate them from the rest. Two vicious competitors in this sector are Unilever and Procter & Gamble. They are the key suppliers of the products above. An article by Cincinnati business Courier titled “P&G, Unilever step up competition in India” will be under review. The news article is about the cut throat competition between the two firms amidst other smaller players in the market. The article goes ahead to show how advertising plays a major role in product differentiation and how the two have a pending case in court due to unfair practices in advertising. In the article it is noted from a research firm that the Indian consumer stands to benefit from monopolistic competition due to product improvement and product introduction. This article seems relevant for discussing the topical issue of monopolistic competition die to the fact that it touches on two profound competitors and also because some business practices are highlighted.
Perfect competition market structure
Monopolistic competition as the name suggests, has characteristics of both a monopoly and a perfect competitive market structure. Similarities that are compared with competitive firms are that players in the market have free entry and exit. Similarities pegged to monopolies are that the firms do not sell same products but rather differentiated products. Product differentiation refers to the efforts that firms engage in to distinguish their products from the rest of the competition. Product differentiation may occur through various means and they may include different packaging of products, intensive advertising or inclusion of certain ingredients exclusive to the firm alone. Economists’ definition of a monopolistic firm involves an analysis in the use of revenues, profits, losses and costs both in the short run and long run. In the short run the demand curve of a monopolistic competitive firm will be downward sloping and will resemble that of a monopolist. In the short run also the demand is always greater than the marginal revenue; profits are maximized where marginal costs equate to marginal revenue AND total profits equal to the product of total quantity and the difference between price and average cost. In the long run however, all the firms make an economic profit equal to zero and this is due to limited entry and exit in the long run (Basic economics, 2010).
The above illustration symbolizes how a monopolistic competitive firm will look like in the long run and it can be observed that the average cost equals the average revenue and therefore it breaks even (Mas-Colell, Whinston & Green, 1995).
It can be observed from the information contained in the article several similarities and differences between the article and the economic theory that is touching on monopolistic competition. In theory we have established that a monopolistic firm is one which a market exists with a very huge number of buyers and sellers with both free entry and exit for players but the scenario in the article does not correspond to the theory (Environmental Economics Dictionary, 2010). Only two major players have been identified from the article, i.e.Unilever and Procter & Gamble. Similarities between the theory and the article are also observed. For example, in theory we are told that product differentiation is done through various methods and among those methods is advertising. From the article we learn that advertising is a very critical item in marketing and trying to woo consumers into thinking that your product is better than the competitors. From the article we learn that there is even a pending case in court involving an advert that one company felt had an unfair due advantage over one of their products.
Another similarity between the theory and theory is observed by the entry levels of the firms into the Indian market. Theory recognizes both short term and long run behaviors and effects on the firms in question. In the short run firms are bound to make more revenues as players in the industry are very few but in the long run economic profits are reduced to zero. A manager from one of the firms says “We have recently entered the market in big, global categories with top, global brands like Pampers diapers and Olay Skin Care” par 6, which shows that the market had now started establishing itself for the long run.
It can be established from the news article that monopolistic competition exhibits quite some substantial levels of activities. There are a lot of key changes that can be observed from the firms in the market in the advent of a new player joining the scene. Lots of policies have to be revised and strategies set afresh. Morgan Stanley India, affirms that India would experience new products and even new categories of products due to the cut throat competition of the players in the market. From the article we can actually confirm changes taking effect were not only product introduction but also quality improvement and better pricing for their products, “We are hugely committed to product quality while also being competitive on pricing” par 19. Therefore changes are being seen or are anticipated to be felt in the near future in the market.
Monopolistic competition from the article gives rise to changes, and these changes may be positive or negative. From a theoretical point of view competition is good when survival of one does not harm the existence of the other while it would be very bad when injury to the other party is observed (Encyclopedia 2, 2010). From the article also it can be noted that good and bad are bound to occur in such an environment. The Indian consumer stands to benefit a lot from the competition from the firms and this is because prices will reduce with time, quality of the products will improve greatly and lastly their choice of products will be increased. The bad side of the competition is the relationship between the players in the market i.e. the firms. They have already engaged themselves in a tussle and a case is waiting in court. This kind of relationship should not exist between the firms entrusted with giving the consumer the ultimate care.
The above analysis has attempted to compare and contrast the theoretical knowledge on perfect competitive firms and a news article based on an actual scenario on the ground. Many observations have been made and analyzed as above. In closing, it can be concluded that not all theory applies in the real life environment but that theory is important in explaining what is happening on the ground. Competition is also very healthy especially to the consumer but certain limits should be maintained by the key players in the market.
Basic economics. (2010). market structures. Chapter 3. Retrieved on 17th August 2010 from
Encyclopedia 2. (2010). Competition – Consequences of competition. Retrieved on 17th August 2010 from http://www.experiencefestival.com/monopolistic_competition
Environmental Economics Dictionary. (2010). Retrieved on 17th August 2010 from
http://economics.socialsciencedictionary.com/civil_rights – civil_rights/Monopolistic_Competition
Mas-Colell, A. Whinston, M & Green, J. (1995). Microeconomic Theory. Oxford University Press. Chap 11. Retrieved on 17th August 2010 from
Schenk, R. (1997). Monopolistic competition. Retrieved on 17th August 2010 from
Whiteside, S. (2010). P&G, Unilever step up competition in India. Retrieved on 17th August 2010 from http://www.warc.com/news/topnews.asp?ID=26534