Terms Beginning With 'm'

Monopolistic Competition

  • October 28, 2020
  • Team Kalkine

What is monopolistic competition?

Monopolistic competition is an imperfect competitive market. A monopoly has a single producer, an oligopoly has a few dominating firms, but there are a large number of firms in monopolistic competition. 

Perfect competition and monopoly sit at the opposite ends of the competition spectrum. A market with perfect competition assumes perfect information among many buyers and sellers, trading homogenous products. 

Imperfect competition includes monopolistic competition, oligopoly, duopoly, monopoly. Industries that usually fall under monopolistic competition include clothing, footwear, restaurants etc. But why these markets have monopolistic competition?

Monopolistic competition will have a large number of buyers and sellers dealing with differentiated products with low barriers to entry and exit. With product differentiation capabilities, consumers also perceive goods as unique to each other. 

Moreover, products and services in monopolistic competition are not perfect substitutes, and consumers can differentiate on account of brand, location, quality. 

Firms in monopolistic competition undertake decisions independently, and there exists some degree of market power among producers. They maximise profits when marginal costs equal marginal revenue. 

When firms compete under monopolistic competition, it leads to an increase in selling expenses, which are aimed to influence the demand curve of the firm. Unused capacities would also hurt firms because the cost will be higher than the profit maximising output. 

Some industries with monopolistic competition 

  1. Restaurants are often large in numbers, but they largely sell different food, cuisine etc. In addition, there is usually no barriers to entry. 
  2. Consumer electronic market has great intensity of differentiated products in terms of features. There are many sellers and buyers in the market, and globalisation has also increased the number of sellers. 
  3. Consumer staples like toothpaste, soaps, detergents also fall under monopolistic competition since there are several large players and many small players. These products are differentiated on the basis of ingredients, use etc. 
  4. There are many bakery shops in a city or town selling slightly different products in terms of say taste, price, appearance to consumers. If the brand is famous in the town, the firm could dictate the prices as well. 
  5. Generally, there is an abundance of hairdressers. But the service offered by each would not be similar. If a customer had an unpleasant experience with any barbershop, he will likely not go to the same place again. On the contrary, when the customer is satisfied, he may be reluctant to visit other barbershops.  

Market power 

The demand curve for an individual firm is downward sloping in monopolistic competition. It means a decrease in prices will lead to an increase in quantity demand. Because firms have market power stemming through product differentiation, the price can be influenced without losing customers. 

Firms that achieve a price leadership are positioned as a price setter and dictate the prices of products. Since competition is intense, firms emphasise on product differentiation to achieve market power. 

They seek to reflect that products are an imperfect substitute for each other, and this is gained by differentiating factors, including brand awareness, quality. As a result, firms are able to increase the price without losing the consumer base. 

Moreover, every firm in monopolistic competition aspires to dominate the market and expand the size of the market. Therefore, firms incur selling expenses to influence the quantity demanded at different price levels.

Product differentiation

Product differentiation is a strategy of the seller to differentiate their products from other products in the market. In monopolistic competition, there is a significant level of non-price competition among many firms. 

It becomes imperative to build favourable product differentiation for firms operating in a monopolistic market. Product differentiation is essentially the key in monopolistic competition. 

Firms undertake research to improve differentiation and demonstrate unique aspects of the product through marketing and advertising. Differentiation does not mean creating differences between the products. 

Varying consumer’s perception regarding the product is differentiation. Some factors that drive differentiation include distribution, marketing, and availability. Product differentiation could be in terms of quality, which will likely result in a higher price. 

Producers can differentiate products on the basis of design and features offered by the product. Sales promotion and advertising also differentiate products among consumers. Buyers can ignore price and features depending on the brand. 

Overall, the objective of product differentiation is to create a unique image of product among existing and prospective consumers. Firms always aspire that product differentiation should deliver non-price competitive benefits.

Marketing in Monopolistic competition

A secret sauce of many successful companies has been branding and advertising. A marketing strategy is very crucial for a firm to achieve its long-term goals as well as short-term. 

Since firms in monopolistic competition race to differentiate products, advertising, and branding is often a go-to strategy for firms. Firms try to engage with clients through various point of contacts such as television, hoardings. 

Advertising is a practice for companies used to communicate with customers. Its objective is to inform, educate and familiarise existing consumers or prospective consumers with the products and brand. Moreover, advertising is used to develop brand image and awareness. 

The motive of branding is to ignite a response or reaction among consumers when they come across a brand or its products. Brand reputation is constructed through consumers’ previous experience and continuous advertising. 

Brand reputation, as a non-price differentiating factor, is perhaps the best strategy to compete in monopolistic competition. Firms also work consistently to manage brand reputation and ensure products deliver the highest quality. 

Via advertisements, the consumers are informed about the product and features, and an informed buyer knows what to buy, therefore minimising the cost of choosing product since consumer already knows the features and about the brand. 

When entering new markets, advertisements are extensively used by firms to communicate their value proposition to consumers and establish a brand image. It would eventually make consumers comfortable when they try the product. 

More importantly, failed and misleading advertisement can backfire at a brand reputation. Before the advertisement is launched, there lies an uncertainty on the expected reactions from consumers. Therefore, reputational damage to the brand and firm would also impact the firm in the market. 

What is Day Trading? Day trading is popular among a section of market participants. It is a type of speculation wherein trades are squared-off before the market close in the same day. An individual or a group is engaged in buying and selling of securities for a short period for profits, the trades could be active for seconds, minutes or hours.  One can engage in day trading of many securities in the market. Anyone who has sufficient capital to fund the purchase can engage in day trading. For a class of people, day trading is a full-time job.  Day traders are agnostic to the long-term implications of the security and motive is to benefit from the price changes on either side and make profit out of the asset price fluctuations within a day. They bet on price movements of the security and are not averse to take short positions to benefit from the fall in price.  Day trading is not only popular among individuals or retail traders but institutional traders as well, therefore the price movements are large sometimes depending on the magnitude of information flow and accessibility.  Everyone wants to make money faster, and many are inclined to speculate in markets, but it comes with considerable risk and potential loss of capital. People engaged in day trading also incur losses, and oftentimes outcomes are disheartening.  Day trading is a risky activity, similar to sports betting and gambling, and it could become addictive just like gambling and sports betting. Since the motive is to earn profits, the profits realised from day trading also tempt people to continue speculating.  People spend considerable time and efforts to make the most out of day trading. They have to continuously absorb and incorporate information flow, which has become increasingly accessible driven by new-age communications systems like Twitter, Facebook, forums etc. But not only information flows have been favourable, day traders are now equipped with best in class infrastructure to execute trades even on compact devices like mobile phones. The accessibility to markets is at a paramount level and gone are days of phone call trading and lack of information flows.  What are the essentials for Day Trading? Basic knowledge of markets With lack of basic knowledge of markets, day trading may yield unacceptable outcomes. It becomes imperative for people to know what’s on the stake. Prospective day traders should know about capital markets, and the securities traded in capital markets like bonds, equity and derivatives.  Buying shares and expecting a return from the price movements are on the to-do list for many. However, it is important to know about and risks and potential returns from speculating in capital markets.  After getting some basic knowledge about markets and securities, aspiring day traders should know how to analyse market prices of securities through fundamental analysis and technical analysis. Although day traders don’t practice fundamental analysis extensively, they spend considerable time to apply technical analysis, to formulate a entry and exit strategy.   Device and internet connection Trading is now possible on mobile applications as well as computer applications or websites. An aspiring day trader will likely begin with mobile phone given the accessibility, and laptops/computers are useful as scale grows larger and complex.  Internet connection is prerequisite to practising day trading, and it is favourable to have a fast internet connection to avoid glitches and potential problems. These perquisites are now available with large sections of societies.  Broker and trading platform A broker will facilitate a market for potential trades. The security brokerage industry has also seen a profound shift as technology has driven cost lower while competition is ramping up across jurisdictions. Large retail brokerages have moved towards zero commission trading in the U.S., and the same is seen being the trend across other geographies as well.  The entry of discount and online brokerages has perhaps given wings to the retail market participants as well as the retail market for security brokers. Robinhood has grown immensely popular in the United States, but there are many firms like Robinhood in other jurisdictions. Each country has some firms with business model on same lines as Robinhood.  Brokers now offer high-quality mobile applications and web services to clients, and trading security has never been so accessible. They also provide access to the global market along with a range of securities, including commodity derivatives, currency derivatives, CFDs, options, futures, bond futures etc.  Real-time market information flow   On public sources, market price information is at times not live due technical shortcomings, which will not work appropriately, especially for day traders. Brokers not only provide platform and market but several other services, including margin lending, real-time data, research.  Day traders closely track prices of securities and overall information flow to incorporate developments in bidding, and real-time data provides accurate prices throughout market hours.  Information flow largely relates to the news around the company, industry or economy. Day traders now have far better sources of information than the conventional sources, and sometimes these sources could be exclusive to a group.  What are the risks of day trading? Most of the aspiring day traders end up losing money, given the lack of experience and knowledge. They should rather only bet on capital that they are comfortable to loose, in short, they should avoid risk of ruin. Day trading is sort of pure-play speculation and application of knowledge, information flow, laced with good trading system is paramount. The only concern of day traders is movement in price, which contradicts from investments. Day traders try to time and ride the momentum in the price and exit the trade before momentum turns otherwise, which can happen frequently.  It consumes considerable time and induces stress on the individuals given the nature of security prices, which can move north and south abruptly throughout the day, hours, minutes and seconds. Day traders should have enough capital to trade in cash instead of margin.  Day trading on margin or borrowed money is extremely risky and has the potential to make a person insolvent, especially in cases of extreme risk-taking. The leverage associated with borrowed money magnifies profits as well as losses.  Aspiring day traders should equip themselves with adequate knowledge, competency and sound risk management process. Although fast money is dear to most, it is better to know what is at stake before jumping into markets with excitement.   

Defining Macroeconomics Macroeconomics is a branch of Economics that evaluates the functioning of an economy as a whole. It studies the performance and behaviour of key economic indicators such as economy’s output of goods and service, exchange rates, the growth of output, the rate of unemployment and inflation, and balance of payments.  Macroeconomics emphasises on the policies and economic behaviour that influence consumption and investment, exchange rates, trade balance, money flow, fiscal and monetary policy, interest rates, national debt, and factors influencing wages and prices.  The scope of the subject goes beyond microeconomic topics like the behaviour of individuals, firms, markets, and households.  History of Macroeconomics Macroeconomics originated with John Maynard Keynes post the great depression when the classical economist failed to explain the great economic fallout. Classical economics mostly comprised theories that studied pricing, distribution, and supply & demand. In 1936, John Maynard Keynes published – The General Theory of Employment, Interest and Money – effectively changing the perception of how macroeconomic problems should be addressed. The theories of Keynes shifted to focus on aggregate demand from the aggregate supply.  Keynes said: ‘In the long run, we are all dead’. This statement was made to dismiss the notion that the economy would be in full employment in the long run. Later the theories developed by Keynes formed the basis for Keynesian economics, which gained popularity over other schools of thoughts including Neoclassical economics. Neoclassical economics emerged in the 1900s. It introduced imperfect competition models, which included marginal revenue curves, indifference curves. The theories in neoclassical economics argued about the efficient allocation of limited productive resource.  Neoclassical economists explain consumption, production, pricing of goods and services through supply and demand.  Some assumptions of this thought were an individual’s motive is to maximise utility as companies seek to maximise profits. Individuals make rational choices and act independently on perfect information.  Over the years, many new schools of thought in Macroeconomics have found footing in the economics world. These include monetarist theories, new classical economics, new Keynesian economics, and supply-side macroeconomics.  Difference between Macroeconomics and Microeconomics Major topics in Macroeconomics National income and output  The estimation of national income includes the value of goods and services produced by a country in a financial year domestically and internationally. National income essentially means the value of total output generated by an economy in a year.  National income can also be referred as national expenditure, national output or national dividend.  Financial systems Understanding financial systems is an important concept in macroeconomics. A financial market is a market for financial securities and commodities, including bonds, shares, precious metal, agriculture goods.  It is important for an economy to have markets where buyers and sellers can exchange goods. A financial market helps in the allocation of resources. Financial markets facilitate savings mobilisation, i.e. financial intermediaries channelise funds from savers to borrowers.  Investment remains on the agenda for policymakers to promote growth, and financial markets facilitate funds by allowing individuals to invest in bonds and stocks, which are issued by institutions seeking funds for investments.  Business cycles A Business cycle or an economic cycle refers to fluctuations in production, trade or economic activities. The upward and downward movement generally indicates the fluctuations in gross domestic product.  A business cycle has four different phases: expansion, peak, contraction, and trough. An expansion in an economy is when economic growth, employment, prices are rising. The peak is achieved when the economy is producing maximum output, inflation is visible, and employment levels are running high. After a peak, the economy enters into contraction, which leads to a fall in employment, depleting economic activity, and stabilisation in prices. At trough, the economy is at the bottom of the cycle, and the next phase of expansion starts after the trough.  Interest rates Macroeconomics also deals with interest rates in the economy. Interest rate policy of an economy is formulated and maintained by the central bank. A central bank manages the money supply in the economy.  The intervention by the central bank to propel economic growth is called monetary policy. The monetary policy of an economy seeks to maintain employment and inflation in the economy. The motive of the monetary policy is to achieve full employment and maintain stable prices. 

What is imperfect competition? Imperfect competition is a competitive market setup that includes multiple sellers engaged in selling heterogenous goods. Imperfectly competitive markets are a more accurate depiction of the markets in the real world than a perfectly competitive setup. The sellers in an imperfect market have the liberty to influence prices and are thus price makers. The sellers in this market are often protected by barriers to entry. What are the types of imperfect markets? Imperfect competition can be observed in various forms, including: Monopoly: Monopoly is a single producer market, wherein the producer has entire power as it is a price maker. The producer has control over the output, price, and the quality of the product in the market. There are no substitutes in the market, leaving the consumers with only one choice. Besides, there are many barriers to entry of new firms. Thus, the firm continues to hold its monopoly position. Public utilities are generally a monopoly set up as they have a single provider with no substitutes. Since these are government regulated, the prices are not too high to crowd out certain sections of individuals. Oligopoly: The number of players in this set up is more than one, however it is less than the number of sellers in a monopolistic competition. Here there are few barriers to entry and exit. A few producers have control over the market while other firms are small and are price takers. Thus, there exists a high level of interdependency between firms. This can also lead to firms coordinating in some instances to obtain higher profits. This is most frequently seen in the form of cartels. Monopolistic competition: Just like perfect competition, monopolistic competition also comprises of many buyers and sellers. However, both lie on the opposite end of the competitive market spectrum. Products are heterogenous and producers have greater control over the prices of their products as compared to perfect competition. Monopsony: In monopsony there are many sellers but a single buyer. Thus, buyer has greater bargaining power as compared to other market setups. Thus, buyers may ask for lower prices than what sellers want to sell for. Oligopsony: In oligopsony, many sellers serve a few buyers. Thus, buyers have slightly more bargaining power than in other market setups excluding monopsony. What are the characteristics of imperfect competition? The following characteristics define a market with imperfect competition: Number of buyers and sellers: The number of buyers and sellers vary largely, depending on the type of imperfect markets. Under monopolistic competition, firms are usually small in size and each firm is insignificant with respect to any changes in the entire market. Thus, no single firm can affect the sales of another firm. Each firm functions independently of the other. However, in a monopoly there is only one firm and, in an oligopoly, firms are highly interdependent. Heterogeneous Products: Products provided by different sellers may be similar. However, they are differentiated. This means that there are different variations offered in the same type of product across the market. This allows customers to have a variety of goods to choose from, even when the goods perform similar tasks. These variations in the products may come because of the differences in the quality of the product across sellers. For instance, ice creams are offered by different companies selling dairy. Thus, consumers may prefer one brand over the other for their quality or for their range of flavours. However, the product itself serves the same purpose irrespective of which company it belongs to. Free Entry and Exit of Firms: The free entry and exist exists in monopolistic competition under the imperfect market set up. Free entry and exit of firms allow them to produce close substitutes and consequently leads to a greater supply of goods in the market. However, this is not the same for all types of imperfect markets. For instance, in monopoly there are barriers to entry and exit. Imperfect Knowledge About the Market: Both sellers and buyers do not possess perfect knowledge about the market. Under monopolistic competition firms use advertisement to make consumers aware about their products. Thus, advertisements play an important role. However, same is not true for monopoly. Price Makers: Firm in imperfect markets are price makers. Each firm can decide the price for their products. Thus, producers may charge a price that is higher than the marginal price. This is especially true for a monopoly. Kalkine Group Image How did the theory of imperfect vs perfect competition come to light? The theory of perfect competition was given by French mathematician Augustin Cournot in 1838. The theory helped theorise the economic relationships that existed in the market. The theory, however, was too ideal a representation to fit into the real-world scenario. This model of perfect competition was a hypothetical one and was an oversimplification of real-world scenarios. It did not include other aspects like barriers to entry, imperfect knowledge in markets and heterogeneity of products. Despite these shortcomings, the model of perfect competition was widely accepted and is still popular in theory. Theoretical economics still includes the topic of perfect competition as an integral part. Markets like oligopoly, monopolistic competition, monopsony, monopoly, etc are all extensions and variations to the model of perfect competition. Importantly, the theory of imperfect competition was most prominently popularised by Joan Robinson in 1983 in her book “The Economics of Imperfect Competition”. In this book, Robinson gave the model where each firm enjoyed some monopoly power. This was later extended into the idea of monopolistic competition.

The process of applying game-design elements as well as game principles in non-game contexts. This is mostly used to bring in more participation, competition sprit, and engagement in work.

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