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,$ h# do we ha.e the e/istence o+ e/cess ca)acit# in
mono)olistic com)etition
'iscuss the social desirabilit# o+ mono)olistic com)etition
ns! (n mono)olistic com)etition there are a lar%e number o+
bu#ers and sellers in the
market but each +irm unlike )er+ectl# com)etiti.e +irm is a
)rice maker and )roduces
sli%htl# di++erentiated )roduct$ 2he# sell the same )roduct with
di++erent brand names
Each +irm is a )rice maker and hence the# +ace downward slo)in%
R N' MR cur.es
in the short run$ (n the lon% run due to +ree entr# and e/it
)roduction increases and )rice+alls and each +irm wants to )roduce
at the lower minimum cost$
'ue to the increase in the number o+ +irms3 the +irms are in a
no )ro+it-no loss situations
or else earn normal )ro+it in the lon% run$ But unlike a )er+ect
com)etition each +irm
cannot )roduce at minimum )oint o+ 4C$ 2he# )roduce at the
downward or +allin%)ortion o+ 4C but cannot )roduce at minimum
4C$
2hat is the reason that each +irm under mono)olistic com)etition
has e/cess ca)acit#
which the# cannot utili5e to )roduce at minimum 4C$
Mono)olistic com)etition is a common market structure where man#
com)etin%
)roducers sell )roducts that are di++erentiated +rom one another
that is3 the )roducts aresubstitutes3 but are not e/actl# alike3
similar to brand lo#alt#!$ Man# markets are
mono)olisticall# com)etiti.e common e/am)les include the markets
+or restaurants3
cereal3 clothin%3 shoes and ser.ice industries in lar%e
cities$
2he social desirabilit# o+ mono)olistic com)etition is as
+ollows:-
1$ E/istence o+ e/cess ca)acit#- (t means that the )roducer is
able to char%e a )rice +romthe consumer which is e.en hi%her than
the Mar%inal Cost$
7$4oss in consumer sur)lus$
8$4e.el o+ out)ut is less than that o+ out)ut in )er+ect
com)etition- 2his is due to the
downward slo)in% R and MR cur.e$
9$(n case o+ mono)olistic com)etition3 there is a dead wei%ht
loss$
$;n+air e/)enditure incurred b# the +irm on ad.ertisement +or
)roduct di++erentiation:-d.ertisin% induces customers into s)endin%
more on )roducts because o+ the name
associated with them rather than because o+ rational
+actors.
6$ (n a mono)olisticall# com)etiti.e en.ironment3 there are
uni
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=owe.er3 because the brands are .irtuall# identical3 a%ain
in+ormation %atherin% is
relati.el# ine/)ensi.e$ "aced with a mono)olisticall#
com)etiti.e industr#3 to select the
best out o+ man# brands the consumer must collect and )rocess
in+ormation on a lar%enumber o+ di++erent brands$ (n man# cases3
the cost o+ %atherin% in+ormation necessar# to
selectin% the best brand can e/ceed the bene+it o+ consumin% the
best brand .ersus a
randoml# selected brand!$
>$ (n most mono)olistic com)etiti.e markets3 mono)ol# )ower
is small$ ;suall# enou%h
+irms com)ete3 with brands that are su++icientl# substitutable3
so that no sin%le +irm hasmuch mono)ol# )ower$ n# resultin%
deadwei%ht loss will there+ore be small$ nd
because +irms? demand cur.es will be +airl# elastic3 a.era%e
cost will be close to the
minimum$
@$ n# ine++icienc# must be balanced a%ainst an im)ortant bene+it
+rom mono)olistic
com)etition: )roduct di.ersit#$ Most consumers .alue the abilit#
to choose amon% a wide
.ariet# o+ com)etin% )roducts and brands that di++er in .arious
wa#s$ 2he %ains +rom
)roduct di.ersit# can be lar%e and ma# easil# outwei%h the
ine++icienc# costs resultin%+rom downward-slo)in% demand
cur.es$
