Monopolistic competition market is one of imperfect competition market. This monopolistic competition market theory was developed due to dissatisfaction with the analysis of the perfect market competition model or the monopoly market.
However, if viewed from a monopolistic market structure, it is closer to a perfectly competitive market, but companies will participate more in that market in order to produce a product that is different and also has its own characteristics.
This monopolistic competition market is a market with many consumers who produce a different commodity and can also be referred to as a market where there are many sellers who offer one type of goods with many different products in terms of quality, shape, and product size. the.
In a monopolistic competition market, every consumer will feel the difference in the characteristics of each product produced by a company with products produced by other companies.
The existence of these differences will reflect the actual differences between the products they will consume or just differences in consumer perceptions that the various products produced by various companies operating in the market are indeed very different.
As a simple example, product differences can be seen from their physical form such as differences in function, shape, or product quality. This difference can also be seen in relation to a brand, logo, or packaging.
In addition, it can also be seen from the term of the sales credit, the availability of commodities, the ease of accessing them, after sales services, the location for getting the community, services, and much more.
Various examples of monopolistic commodities that are often found in our daily lives are clothing, medicines, cosmetic tools, restaurants and many other food commodities.
Definition Monopolistic Competition Market
A monopolistically competitive market is basically a market that is between two extreme types of markets, namely a perfectly competitive market and a monopoly, for this reason the nature of this market still contains elements of the characteristics of a monopoly market and also a perfectly competitive market.
We can interpret this monopolistic competition as a market where there are many producers that produce various goods.
Monopolistic Competition Market Characteristics
1. There are many sellers
Companies in monopolistic markets have sizes that tend to be the same size, this condition will give birth to the production of a company that tends to be small when compared to all production in the market.
If in the market there are already several dozens of companies that exist, then monopolistic competition is very likely to occur.
2. Production of goods is more diverse
This feature is the most important trait in distinguishing between monopolistic competition and perfectly competitive markets.
In perfect competition, the production of various companies will be the same, of course this is different from the monopolistic competition market where the production of goods is varied and physically it will be easier to distinguish between the production of one company and the production of other companies.
3. The company has the nature of power in influencing prices
A monopolistically competitive market can affect prices even though it is relatively smaller than the results of perfect competition which has no power or price influence and affects prices.
This happens because of the production of very different goods, so buyers will tend to prefer goods from the company.
4. Industrial Income is Relatively Easier to Obtain
Some of the factors that can cause industrial income to tend to be easier to obtain are:
- The capital required is relatively large, even though it is compared to building a perfectly competitive market company
- Because the company must produce goods that are more attractive than those already in the market, and also promote these goods to gain customers.
5. Very Active Sales Promotion Competition
Price is not a determining factor of the size of the market and of the companies in the monopolistic competition market.
A company will be very likely to sell goods that are relatively more expensive, but it cannot attract many customers, on the contrary, another company that sells goods at low prices will be able to attract more customers.
This condition is caused by the nature of the goods they produce, namely goods that are of different nature. For this reason, in influencing the taste of buyers, every businessman must compete not with price but also improve the quality and design of an item
Advantages in a Monopolistic Competitive Market
The demand curve that firms face in monopolistic competition will be more elastic than that faced in a monopoly market. However, it does not reach the perfectly elastic as the demand curve faced by various firms in a perfectly competitive market.
Maximizing Profits in the Short Term
The demand that the firm will face in monopolistic competition is part of the total market demand. Maximum profit will be obtained if the company continues to produce until the level of achievement of MC = MR. The company in this case will earn above-normal profits in a short period of time.
Maximizing Long-Term Profits
Profits that exceed the normal limit will lead to the development of the company in the market. Thus, every company in the market will face a diminishing demand at various price levels. So, profits will decrease to normal levels.
The Inefficiency Of Monopolistic Competition Market.
There are two causes of the inefficiency of this monopolistic competition market, namely the selling price is greater than marginal cost, and excess capacity.
If the company suffers a minimum loss, it will exit the market. Thus, the number of companies in the market will be less and the number of demands faced by the remaining companies will be greater.
The company’s exit from the market will continue until the company earns normal profits. Under these conditions, there will be no more companies entering the market and no more companies leaving the market. This is what is called the long-run equilibrium of the firm in monopolistic competition.
Advantages and Disadvantages of Monopolistic Competition
The advantages of a monopolistic competition market are:
- The number of producers in the market will provide benefits for consumers in choosing the best product for them.
- The existence of freedom of entry and exit for producers, so that it will encourage producers to always innovate in producing their goods.
- The existence of product differentiation will encourage consumers to be more selective in determining which products will be purchased later and can make each consumer can further the product he will choose.
- This market is also relatively easy for consumers to find because most of their daily needs will be available in monopolistic markets
Disadvantages of Monopolistic Market
- The monopolistic market has a very high level of competition, both in terms of price, quality and service. Thus, producers who do not have sufficient capital and experience will exit the market faster.
- Very large capital is required to enter the monopolistic market because the market players in it have very high economies of scale.
- This market will encourage various producers to always innovate, so that it will increase production costs which will have an impact on product prices that must be paid by each consumer.
An example of a monopolistic competition market in Indonesia is the sale of Honda and Yamaha motorcycles.
Honda motorcycles are always said to be more efficient than other motorcycles. While the Yamaha motorcycle is claimed to have more power than other motorcycles.
This is an example of a monopolistic competition market where these two brands are both motorcycle manufacturers. However, both have very different product characteristics.
Honda tends to be superior in terms of fuel because of the fuel economy used by them. While Yamaha will be superior in terms of acceleration. Next, just depend on consumer choice.
This is our explanation of the monopolistic competition market.
So, we can conclude that the monopolistic competition market is a market that was developed because of dissatisfaction in the perfect competition model market and the monopoly market or simply the monopolistic competition market is a combination of a monopoly competitive market and a perfectly competitive market.
This understanding will be very important to understand for those of you who are new to the business world. So, you have to determine which market you will enter and have the right strategy to be able to compete in it.