Monopolistically competitive markets have many producers in the market, with no business having total control over the market price. Consumers perceive that there are non-price differences among the competitors' products (product differentiation), there are few barriers to entry/exit, and producers have some control over price.
Product differentiation is important with monopolistic competition because it helps a company seem different to the consumer, and presumably better than the others on the market.
Several ways to differentiate products are by developing a recognized brand name, product logo or packaging; securing a superior location or developing a reputation for exceptional services; engaging in product redevelopment and improvement; and developing an effective advertising strategy.
Monopolistic Competitive Companies
Small Company | Medium Company | Large Company | |
Features: | Autobody (Calgary Coachworks) | Shoe store (Shoe Warehouse) | Fast food chain (Dairy Queen) |
Differentiated products | Specializing in collision repair | Accept Airmiles on purchases. No other big differentiations | Healthy options (salads), ice cream (now in smaller sizes), milkshakes |
Control over price | Yes (if independent) | No | No |
Mass advertising | Word of mouth, radio, flyers | Flyers | TV commercials |
Brand name goods | Dependent on supplier for materials, etc. | Company brand name isn’t incredibly strong, but they carry a lot of brand name shoes (e.g. Sketchers) | The Dairy Queen brand name is strong |
Barriers to entry/exit | No | Franchise opportunities could be expensive | Franchise opportunities could be expensive |
Location | Everywhere | Shopping malls | Shopping malls, foodcourts in schools, office buildings, etc. |
Some further examples of monopolistically competitive industries are real estate, software design, authors, proofreaders, manufacturing markets, such as textiles, footwear and furniture, brake and muffler shops, travel agencies, hair salons, dry cleaning shops, retail (clothing) shops, gasoline retailing, hairdressing, shoe repair, tax accounting, and almost all services aimed at the home owners, such as roofers, plumbers, carpet layers, and painters.
A model of monopolistic competition:
Source: http://ingrimayne.com/econ/International/MonoComp.html
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