This page covers the evaluation of monopolistic competition – a market structure you need to know for your IB Economics examination.
Definition: a market structure with a large number of firms producing similar but differentiated products. Barriers to entry and exit the market are low. Firms are price makers as each firm possesses some market power.
Evaluation of Monopolistic Competition – Advantages:
- Differentiated products – this means more choice for consumers
- Firms have incentives to innovate – higher and improving quality of products, looking for more efficient ways of production, possibly leading to a lower prices
- Advertising – usually there is a high level of advertising in monopolistic competition; this provides consumers with information and hence, lowers search costs
- Creates employment in marketing (a rather far stretched advantage, mention only briefly)
Evaluation of Monopolistic Competition – Disadvantages:
- Neither technically nor allocatively efficient – this leads to deadweight welfare loss – the primary economic problem of allocating resources in the most efficient way is not solved
- Resources are wasted on e.g. useless packaging
- Large number of firms – that means limited access to Economies of Scale
- Large number of firms – could lead to too much choice for consumers and in turn to higher search costs
- Advertising – might mislead consumers
- Advertising is usually costly, hence, product prices might be higher
- No abnormal profits limited innovation and investment in R&D
Monopolistic Competition – Examples:
- Restaurants/Bars/Pubs (fast food restaurants/chains can usually be oligopolies rather than monopolistic competition)
- Hotel businesses
- The market for chocolate chip cookies (might be that some countries are dominated by certain firms)
This covers most probably all advantages and disadvantages of monopolistic competition needed to know for your IB Economics course – namely the evaluation part of your essay/internal assessment.
If you want to know all advantages/disadvantages/real life examples of all 4 market structures (Perfect Competition, Monopolistic Competition, Oligopolies and Monopolies) click here!