Monopolistic Competition

Monopolistic Competition

Why it is hard to make an economic profit in monopolistic competition in the long run?

A monopolistic competition is type of “imperfect competition” when the producer sells goods and products that are “differentiated” based on their branding and quality that tends to differentiate them from others. As a result they cannot be termed as “perfect substitute”. The producer of goods and products at Monopolistic competition follows independent decision making.   They tend to act independently and set the terms and conditions for selling their goods and products. A monopolistic competition does not consider the effects of their price changes on its rival competitors. They can increase the price of their goods and various products without losing its customer base. They can also decrease the prices of their products without trigger price ware with its rival competitors. As a result, the demand curve for as monopolistic market is the “downward sloping demand curve” . The demand curve is highly elastic although not "flat". It implies that the firm can sell more goods and products by simply reduce the price. In monopolistic competition, a firm and enter and exit the market at his or her own will. There are fewer barriers. When a new firm enters a monopolistic market competition, the supply of the goods and products increases.  As a result, the prices of the goods and products would decreases and overall profit of the existing business firms will increases.  When the existing firms in the market are incurring losses, some of the marginal firms will leave the market. And as a result, supply of the goods and product will decrease and the price would increases. One of the unique feature of monopolistic market is that it “there are many firms in each MC product group and many firms on the side lines prepared to enter the market. A product group is a collection of similar products”. The main aim of Monopolistic competition is profit maximizations.

When the “long run” qualities of a monopolistic market are discussed, it is almost as similar to the “perfectly competitive market”. The main difference between the monopolistic competition and the “perfectly competitive market” is that the monopolistic competition produces heterogeneous products whose attributes are very much different from one another and they cannot be substituent from one another. In addition, the monopolistic competitions are also involved in lots of “non-price competition, which is based on subtle product differentiation”. The different firms in the monopolistic competition will surely earn profit in the shorter run. But in the longer run, a monopolistic competition will not only earn the “break event point”, it will earn almost zero or no economic profit. As discussed above, in the shorter run when the number of firm in the market competition is less, the demand for the product and goods is more. As a result, profit increased and cost of production of the goods and products decreases. When new firms enter the market, competition increases. Demand for product and goods decreases as cost of producing the goods and services increases. This leads to a decrease in the profit. For example, if a new gas station opened up in front of an already well function and established gas station, the competition increases. The new gas station might sells refreshments or might provide other services to attract the customers. This might lead to decrease in the profit of the already existing gas station especially in the long run. 

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