Competition is a type of imperfectly competitive market structure. This is a common type of market that is closest to perfect competition.

Monopolistic competition is a type of industry market in which there are many sellers selling a differentiated product, which allows them to exercise some control over the selling price of the product (or service).

Monopolistic competition is not only the most common, but also the most difficult to study form of industrial structures. For such an industry, an exact abstract model cannot be built, as can be done in cases of pure monopoly and pure competition. Much here depends on specific details characterizing the manufacturer's product and development strategy, which are almost impossible to predict, as well as on the nature of the strategic choices available to firms in this category.

Examples of monopolistic competitors are small chains of stores, restaurants, the network communications market, and similar industries. Monopolistic competition is similar to a monopoly situation because individual firms have the ability to control the price of their goods. It is also similar to perfect competition because each product is sold by many firms and there is free entry and exit in the market.

Features of monopolistic competition

A market with monopolistic competition is characterized by the following features:

A large number of buyers and sellers. In a monopolistic competitive market, there are a relatively large number of sellers, each of whom satisfies a small share of the market demand for a common type of product sold by the firm and its competitors. In monopolistic competition, the market shares of firms average from 1 to 5% of total sales in a given market, which is more than in conditions of perfect competition (up to 1%). The number of sellers determines the fact that the latter do not take into account the reaction of their rivals when they choose sales volumes and set prices for their products, in contrast to the situation of an oligopoly, when only a few large sellers operate in the market for one product.
Low barriers to entry into the industry. With monopolistic competition, it is easy to found a new company in an industry or leave the market - entry into a given industry market is not hampered by the barriers that monopoly and oligopoly structures put in the way of a newcomer. However, this entry is not as easy as under perfect competition, since new firms often experience difficulties with their brands, which are new to customers.

Examples of industries with a predominance of monopolistic competition include markets for women's, men's or children's clothing, jewelry, shoes, soft drinks, books, as well as markets for various services - hairdressing salons, etc.
Production of differentiated products with many substitutes. Although an industry market sells goods (or services) of the same type, under monopolistic competition, each seller's product has specific qualities or characteristics that cause some buyers to prefer his product to the product of competing firms. This is called product differentiation as opposed to standardized products that are characteristic of perfect competition. The specificity of the product gives each seller a certain degree of monopoly power over the price: for prestigious goods (for example, Rolex watches, Mont Blanc pens, Chanel perfumes) prices are always set higher than for similar goods that do not have such a famous brand or not so brilliantly advertised.
Presence of non-price competition. Very often, in conditions of monopolistic competition, firms competing with each other do not use price competition, but actively use various methods of non-price competition, and especially advertising. In non-price competition, the epicenter of rivalry between manufacturers becomes such non-price parameters of the product as its novelty, quality, reliability, prospects, compliance with international standards, design, ease of use, after-sales service conditions, etc. Firms in markets with monopolistic competition strive by all means to convince the consumer that that their products differ from those of competitors for the better. Monopoly competitive markets continually develop new products and improve existing ones. Product improvements may be small, but many consumers do respond to changes in product characteristics, allowing the firm to make additional profits until the improvements are adopted by its competitors.

Short term

The essence of monopolistic competition is that each firm sells a product for which there are many close but imperfect substitutes. As a result, each firm faces a downward sloping demand curve for its product. In the short term, the behavior of a firm under conditions of monopolistic competition is in many ways similar to the behavior of a monopoly. Since the product of a given firm differs from the goods of competing firms by special quality characteristics that appeal to a certain category of buyers, then the firm can raise the price of its product without a drop in sales, because a sufficient number of consumers are willing to pay a higher price. Like a monopoly, the firm somewhat underproduces its products and overprices them. Thus, monopolistic competition is similar to a monopoly situation in that firms have the ability to control the price of their goods.

Long term

In the long run, monopolistic competition is similar to perfect competition. In conditions of free access to the market, the potential for profit attracts new firms with competing brands of goods, reducing profits to zero. The same process works in the opposite direction. If demand in a market with monopolistic competition were to decline after reaching equilibrium, firms would exit the market. This is because a reduction in demand would make it impossible for firms to cover their economic costs. They will exit the industry and shift their resources to more profitable ventures. When this happens, the demand and marginal revenue curves of the remaining sellers in the market will shift upward. Firms will continue to exit the industry until a new equilibrium is reached.

The impact of monopolistic competition on society

With monopolistic competition, production efficiency is not achieved. In addition, accusations of unreasonable and unjustified expenditure on product differentiation and advertising are often heard. The following arguments are put forward.

1. Society uselessly wastes limited scarce resources on creating meaningless differences in products of the same type. Thus, aspirin remains aspirin, although for some of its patented and advertised brands the consumer has to pay double or more. Consumers don't really want, say, 50 different brands of soap or toothpaste that are essentially the same. As a result, consumers pay for both unnecessary product differentiation and advertising. Advertising costs sometimes amount to 50% or more of the selling price of a product.
2. Differentiation and advertising seek to influence the tastes and preferences of consumers, change them, create new needs, thus, it turns out that people exist to satisfy the needs of the company, rather than companies serving people. Society has lost its original target orientation - the development of production to meet people's needs.
3. The information contained in advertising is at least minimal and insufficient, and is often deliberately deceptive.
4. Advertising of its product becomes mandatory for a company that does not want to lose in competition. Firms are forced to spend enormous amounts of money unproductively: these expenses do not increase the demand for their product in the market, but their absence will lead to loss of place in the market.
5. Advertising costs are so high that they can become a barrier to entry into the industry and thereby reduce the intensity of competition.
6. Advertising becomes a form of tax on society. For every 15 minutes of news on television there are up to 20 minutes of advertising. When buying a newspaper or magazine, the consumer, along with 50 pages of text of interest to him, is forced to pay for 75 pages of advertisements.

However, it would be unfair to see only the negative sides of monopolistic competition. So, the same product differentiation and advertising are not so clearly bad.

Their supporters note that:

1. Product differentiation helps to most fully satisfy people's needs in all their diversity.
2. Continuous product improvement leads to increased

Monopoly(Greek “monos” - one, “poleo” - I sell) - a company (the situation in the market in which such a company operates), operating in the absence of significant competitors (producing goods (s) and / or providing services that do not have close substitutes). The first monopolies in history were created from above by state sanctions, when one firm was given the privileged right to trade in a particular product. With a pure monopoly, there is only one seller in the market. This can be a government organization, a private regulated monopoly, or a private unregulated monopoly. In each individual case, pricing develops differently. A state monopoly can, through pricing policy, pursue a variety of goals: for example, set a price below cost, if the product is important to buyers who are not able to purchase it at full price. The price may be set with the expectation of covering costs or generating good income. Or it may be that the price is set very high to reduce consumption in every possible way In the case of a regulated monopoly, the state allows the company to set prices that ensure a “fair rate of profit”, which will enable the organization to maintain production, and, if necessary, expand it. And vice versa, with an unregulated monopoly, the company itself is free to set any price that the market will bear. However, for a number of reasons, firms do not always charge the highest possible price. Fear of government regulation, reluctance to attract competitors, or the desire to quickly penetrate the entire depth of the market due to low prices may play a role here. A monopoly controls the market sector it occupies completely or to a significant extent. The antimonopoly legislation of many countries considers the occupation of 30-70% of the market by one company to be a monopoly position and provides for various sanctions for such companies - price regulation, forced division of the company, large fines, etc.

What is monopolistic competition?

Monopolistic competition market model.

– type of market structure of imperfect competition. This is a common type of market that is closest to perfect competition.

Monopolistic competition- a type of industry market in which there are a sufficient number of sellers selling a differentiated product, which allows them to exercise some control over the selling price of the product (or service).

Monopolistic competition is not only the most common, but also the most difficult to study form of industry structures. For such an industry, an exact abstract model cannot be built, as can be done in cases of pure monopoly and pure competition. Much here depends on specific details characterizing the manufacturer's product and development strategy, which are almost impossible to predict, as well as on the nature of the strategic choices available to firms in this category.

Features of monopolistic competition

Abstract model of monopolistic competition in the short run.

A market with monopolistic competition is characterized by the following features:

· A large number of buyers and sellers. In a monopolistic competitive market, there are a relatively large number of sellers, each of whom satisfies a small share of the market demand for a common type of product sold by the firm and its competitors. In monopolistic competition, the market shares of firms average from 1 to 5% of total sales in a given market, which is more than in conditions of perfect competition (up to 1%). The number of sellers determines the fact that the latter do not take into account the reaction of their rivals when they choose sales volumes and set prices for their products, in contrast to the situation of an oligopoly, when only a few large sellers operate in the market for one product.

· Low barriers to entry into the industry. With monopolistic competition, it is easy to found a new company in an industry or leave the market - entry into a given industry market is not hampered by the barriers that monopoly and oligopoly structures put in the way of a newcomer. However, this entry is not as easy as under perfect competition, since new firms often experience difficulties with their brands, which are new to customers. Examples of industries with a predominance of monopolistic competition include markets for women's, men's or children's clothing, jewelry, shoes, soft drinks, books, as well as markets for various services - hairdressing salons, etc.

· Production of differentiated products with many substitutes. Although an industry market sells goods (or services) of the same type, under monopolistic competition, each seller's product has specific qualities or characteristics that cause some buyers to prefer his product to the product of competing firms. This is called product differentiation as opposed to standardized products that are characteristic of perfect competition. The specificity of the product gives each seller a certain degree of monopoly power over the price: for prestigious goods (for example, Rolex watches, Mont Blanc pens, Chanel perfumes) prices are always set higher than for similar goods that do not have such a famous brand or not so brilliantly advertised.

· Presence of non-price competition. Very often, in conditions of monopolistic competition, firms competing with each other do not use price competition, but actively use various methods of non-price competition, and especially advertising. In non-price competition, the epicenter of rivalry between manufacturers becomes such non-price parameters of the product as its novelty, quality, reliability, prospects, compliance with international standards, design, ease of use, after-sales service conditions, etc. Firms in markets with monopolistic competition strive by all means to convince the consumer that that their products differ from those of competitors for the better. Monopoly competitive markets continually develop new products and improve existing ones. Product improvements may be small, but many consumers do respond to changes in product characteristics, allowing the firm to make additional profits until the improvements are adopted by its competitors.

Short term

Long term

1. Abstract model of monopolistic competition in the long run

The impact of monopolistic competition on society

2. Differentiation and advertising seek to influence the tastes and preferences of consumers, change them, create new needs, thus, it turns out that people exist to satisfy the needs of the company, rather than companies serving people. Society has lost its original target orientation - the development of production to meet people's needs.

4. Advertising of its product becomes mandatory for a company that does not want to lose in competition. Firms are forced to spend enormous amounts of money unproductively: these expenses do not increase the demand for their product in the market, but their absence will lead to loss of place in the market.

6. Advertising becomes a form of tax on society. For every 15 minutes of news on television there are up to 20 minutes of advertising. When buying a newspaper or magazine, the consumer, along with 50 pages of text of interest to him, is forced to pay for 75 pages of advertisements.

However, it would be unfair to see only the negative sides of monopolistic competition. So, the same product differentiation and advertising are not so clearly bad.

Their supporters note that:

1. Product differentiation helps to most fully satisfy people's needs in all their diversity.

2. Continuous improvement of the product leads to an increase in living standards.

3. Product differentiation develops in the direction of improving its quality and increasing production efficiency.

5. Differentiation and advertising stimulate competition and give impetus to the development of the entire market system. A comparison of two opposing opinions about the role of advertising and product differentiation shows once again that in economic theory there are no absolute truths and correct answers for all cases of life.

Be that as it may, monopolistic competition is very close in many respects to perfect competition, which practically does not occur in real life. Monopolistic competition is the most common type of market relations. It dominates in the catering industry, book publishing, furniture production and sales, pharmaceuticals, etc. The number of firms in these industries ranges from 500 to 10,000. Monopolistic tendencies in this model are quite weakly expressed, and therefore it is believed that the state can practically not regulate a market of such a structure

Determination of price and production volume under conditions of pure monopoly. Price discrimination

The next stage of our analysis is to study the behavior of a pure monopolist firm in the market, in particular the questions at what price and in what volume the monopolist will sell its product. The optimal production volume of a monopolist firm will depend on two factors - market demand for its products, on the one hand, and the size and structure of its costs, on the other.

Since a monopolist firm acts as an industry, the demand curve for the entire volume of goods it produces is also a market (industry) demand curve. Thus, unlike perfect competition, where the demand for a firm's product is perfectly elastic and the firm can sell different quantities of the product at the same price, the demand for a monopolist's product is not perfectly elastic. The demand curve for its products has a classic downward sloping shape, and the low degree of price elasticity of demand for a monopoly product, generated by the lack of substitute goods, will result in a sharply falling nature of this graph. The downward sloping nature of the demand graph means that the monopolist is obliged to lower the price of the produced product in order sell additional units of it. This fact will affect the dynamics of the indicators of the new and marginal income of the company in question. Therefore, unlike a seller operating in conditions of perfect competition, a monopolist is faced with a situation where its gross income first has a positive trend (increases) and then, having reached a maximum, begins to fall.

For a monopolist firm, the marginal revenue schedule always lies below the demand schedule. This is explained by the fact that for a monopolist MR will be lower than the price (except for the first unit of production), in contrast to a competitive firm for which MR = PX. This is due to the fact that by increasing sales volumes, a monopolistic firm is forced to reduce the price not only for each subsequent unit of production, but also for all previous ones, which were previously sold at a higher price.

On the demand graph for the monopolist’s product (DX), two segments can be distinguished:

Elastic demand (EpD > 1), since here TR increases as the price (P) decreases;

Inelastic demand (EpD< 1), так как здесь TR сокращается по мере того, как снижается цена (Р).

A profit-maximizing monopolist will strive to avoid the inelastic portion of the demand curve for its product, since marginal revenue (MR) takes negative values on this segment. Knowing about the peculiarities of demand for the monopolist’s product, about the “behavior” of the graphs of its marginal and gross income, we can move on to considering the problem of the optimal production volume of the monopoly producer. We use already known approaches - first we apply the method of comparing gross income and gross costs (TR and TC), and then the method of equalizing marginal indicators (MR and MC).

Graphical analysis of the situation in accordance with the first approach involves combining two graphs on the same coordinate axes - TR and TC - and searching for a Qx value for which the distance between these curves will be maximum.

So, with production volumes from 0 to QA and from QB and more, the monopolist firm incurs losses, since in these intervals gross income is lower than gross costs (the TR graph is lower than the TC graph). In the interval from QA to QB, the monopolist makes a profit. In the figure, the maximum profit will be achieved by the monopolist at Qopt and the amount of profit will be the difference between TR and TC corresponding to a given volume of output, i.e. ?max = TRD - TCC.

A graphical interpretation of the MR = MC method for the case of a monopoly producer is presented in the figure below.

The intersection point of the MR and MC schedules (point E) and its parameter Qopt reflect the optimal production volume. Moreover, Qopt in this figure and in the figure above will quantitatively coincide. Next, using the Dx schedule, we determine at what price a given volume of production can be sold by a monopolist; this is the parameter of point A - RA. The projection of point B onto the ordinate axis (ATSV) reflects the value of average gross costs corresponding to the volume Qopt. Thus, the gross income of the monopolist will correspond to the area of the rectangle OPAQopt, and the value of gross costs will correspond to the area of the rectangle OATCBBQopt. Profit will be calculated as follows:

which corresponds to the area of the shaded figure. Or:

Price discrimination.

Under certain conditions, a situation may arise for a monopoly that would be impossible in a competitive market. A monopolist can charge different prices for its products to different buyers to maximize profits. This phenomenon is called price discrimination. Price discrimination is possible if the following conditions are met:

1) the seller of a product must either be a pure monopolist or control the overwhelming part of the market for a given product;

2) the seller must be able to divide buyers into different groups who can pay differently for the product offered, i.e. segment the market; the possibility of segmentation is explained by the fact that different market segments are characterized by demand with different degrees of elasticity;

3) the original buyer of this product cannot sell it at a higher price to other consumers representing a different market segment.

A classic example of price discrimination is the tariff policy of telephone companies, when a minute of conversation at different times of the day has a different cost. A consumer with inelastic demand (for example, a firm manager) will pay a high daily rate. A consumer with highly elastic demand (for example, a student or a pensioner) will pay a low evening tariff. The variety of tariff plans offered by cellular providers can also be mentioned here as an example.

The consequences of price discrimination boil down to the following: a monopolist firm increases profits; with price discrimination, the demand curve for the offered product practically coincides with the marginal income schedule, i.e., the company has no disincentives to reduce production volumes and sellers pursuing a policy of price discrimination increase the output of this product.

A graphical model illustrating this is presented below. If we compare with the situation presented in the figure above, we can state that the optimal production volume for a firm conducting price discrimination will be determined at point A. That is, the optimal production volume for a given firm will significantly exceed the output volume of a firm that does not conduct price discrimination (projection of point B onto the Ox axis in the figure above).

The profit from price discrimination will correspond to the area of the figure BEAC, which is greater than the area of the rectangle ATC BP A AB in this figure.

Main features of the monopolistic competition market.

As practice shows, in real life the conditions inherent in perfect competition and pure monopoly are rarely met. Pure monopoly and perfect competition can be considered as ideal market structures that are at opposite poles. Real market structures occupy an intermediate position, combining certain features of both pure monopoly and perfect competition. One such market structure is monopolistic competition, to describe which it is useful to know both the theoretical model of a perfectly competitive market presented above and the model of pure monopoly.

Conclusion.

Monopolistic competition- a market structure where the features of perfect competition prevail and there are certain elements characteristic of a pure monopoly. Features of monopolistic competition:

1. There is a fairly significant number of small firms operating in the industry, but they are fewer in number than under perfect competition. Firms create similar but not identical products. It follows that:

An individual firm owns only a small share of the market for a given product;

The market power of an individual firm is limited, therefore, the control of the market yen of a product by an individual firm is also limited;

There is no possibility of collusion between firms and cartelization of the industry (creation of an industry cartel), since the number of firms competing in the market is quite large;

Each firm is practically independent in its decisions and does not take into account the reaction of other competing firms when changing the price of its goods.

2. The product sold in the industry is differentiated. In monopolistic competition, firms in the market have the opportunity to produce goods that are different from those produced by competitors. Product differentiation takes the following forms:

Different quality of products, i.e. products may differ in many parameters;

Various services and conditions related to the sale of the product (quality of service);

Differences in the location and availability of goods (for example, a small store in a residential neighborhood may compete with a supermarket, despite a narrower range of goods offered);

Cosmetics, perfumes, pharmaceuticals, home appliances, services, etc. are examples of differentiated products. Firms producing a differentiated product have the opportunity, within certain limits, to change the price of the goods sold, and the demand curve of an individual firm has, as in the case of a monopoly, a “falling” character. Each monopolistic competitor firm controls a small share of the industry market. However, product differentiation leads to the fact that a single market breaks up into separate, relatively independent parts (market segments). And in such a segment, the share of an individual, perhaps even small, company can be very large. On the other hand, goods sold by competitors are close substitutes for the given one, which means that the demand for the products of an individual firm is quite elastic and does not decrease as sharply as in the case of a monopoly.

3. Freedom of entry into the industry (market) and exit from it. Since in conditions of monopolistic competition firms are usually small in size, there are most often no financial problems when entering the market. On the other hand, with monopolistic competition, additional costs may arise associated with the need to differentiate your product (for example, advertising costs), which may become an obstacle to the entry of new firms. The existence of free entry of firms into the industry leads to the fact that, as a result of competition, a typical situation becomes when enterprises do not receive economic profits in the long run, operating at the break-even point.

4. The existence of non-price competition. The situation of lack of economic profit, functioning at the break-even point in the long term cannot satisfy the entrepreneur for long. In an effort to obtain economic profit, he will try to find reserves for increasing revenue. The possibilities for price competition in conditions of monopolistic competition are limited, and the main reserve here is non-price competition. Non-price competition is based on using the advantages of individual firms in the technical level, design, and reliability of operation of the products they produce. The decisive role is played by such parameters of manufactured products as environmental friendliness, energy intensity, ergonomic and aesthetic qualities, and operational safety. There are several methods for implementing non-price competition:

Product differentiation associated with the appearance at a given time of a significant number of types, types, styles of the same product;

Improving the quality of the product over time, which is necessary due to the existence of competition in the industry;

Advertising. The peculiarity of this form of non-price competition is that consumer tastes are being adapted to existing types of products. The purpose of advertising is to increase the company's market share of this product. To be successful, each monopolistic competitor company must take into account not only the price of the product and the possibility of changing it, changing the product itself, but also the possibilities of the advertising and propaganda company.

Monopolistic competition- a fairly common type of real market structures. This market structure is typical for the food industry, shoe and clothing production, furniture industry, retail trade, book publishing, many types of services and a number of other industries. In Russia, the state of the market in these areas can clearly be characterized as monopolistic competition, especially considering the fact that product differentiation in these industries is very high.

So, monopolistic competition is characterized by the fact that each firm, in conditions of product differentiation, has some monopoly power over its product: it can increase or decrease the price of it, regardless of the actions of competitors. However, this power is limited both by the presence of a sufficiently large number of producers of similar goods and by significant freedom of entry of other firms into the industry. For example, “fans” of Reebok sneakers are willing to pay a higher price for its products than for products from other companies, but if the price difference turns out to be too significant, the buyer will always find analogues from lesser-known companies on the market at a lower price. The same applies to products from the cosmetics industry, clothing, footwear, etc. Monopolistic competition is characterized by a relatively large number of sellers who produce differentiated products (women's clothing, furniture, books). Differentiation is the basis for creating favorable conditions for selling and updating products. An oligopoly is characterized by a small number of sellers, and this “small number” means that decisions about determining price and production volumes are interdependent. Each firm is influenced by the decisions made by its competitors and must take these decisions into account in its own pricing behavior and determination of output. Monopolistic competition occurs when multiple sellers compete to sell a differentiated product in a market where new sellers may enter.

A market with monopolistic competition is characterized by the following:

1. The product of each company selling on the market is an imperfect substitute for the product sold by other companies. The product of each seller has exceptional qualities and characteristics that serve to ensure that some buyers prefer his product to the product of a competing company. Product differentiation means that the item sold in the market is not standardized. This may occur because of actual and qualitative differences between products or because of perceived differences that arise from differences in advertising, brand prestige or the “image” associated with owning the product.

2. There are a relatively large number of sellers in the market, each of whom satisfies a small but not microscopic share of the market demand for a common type of product sold by the firm and its rivals.

Under monopolistic competition, the size of the market shares of firms in general

exceed 1%, i.e. the percentage that would exist under perfect competition. Typically, a firm accounts for 1% to 10% of market sales during the year.

3. Sellers in the market do not take into account the reaction of their rivals when choosing what price to set for their goods or when choosing guidelines for annual sales. This feature is a consequence of the relatively large number of sellers in a market with monopolistic competition, i.e. If an individual seller cuts his price, it is likely that the increase in sales will not come at the expense of one firm, but at the expense of many. As a consequence, it is unlikely that any individual competitor will incur significant losses in market share due to a reduction in the selling price of any individual firm. Consequently, competitors have no reason to respond by changing their policies, since the decision of one of the firms does not significantly affect their ability to make profits. The firm knows this and therefore does not consider any possible reaction from competitors when choosing its price or sales target.

4.The market has conditions for free entry and exit. With monopolistic competition, it is easy to start a company or leave the market. Favorable conditions in a market with monopolistic competition will attract new sellers. However, entry into the market is not as easy as it was under perfect competition, since new sellers often have difficulty introducing brands and services that are new to customers. Consequently, established firms with established reputations can maintain their advantage over new producers. Monopolistic competition is similar to a monopoly situation because individual firms have the ability to control the price of their goods. It is also similar to perfect competition because Each product is sold by many firms, and there is free entry and exit in the market.

List of used literature:

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· Savitskaya E.V. Course of lectures on microeconomics, M.: – 2002. – 302

· Borisov E.F., Volkov F.M. Fundamentals of economic theory: Textbook. allowance for the environment. specialist. uch. institutions.- M.: Higher. school, 1994. P. 74

· 1. Belokrylova O.S. Economy. - Rostov-on-Don: Phoenix, 2003.

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· Economic theory. / Scientific ed. and hands auto. team V.D. Kamaev. - M.: VLADOS, 1999.

7.4. PRICING IN CONDITIONS
MONOPOLY COMPETITION

Perfect competition and monopoly are opposite extreme models of market structures. However, there may be intermediate models that are not fully competitive, are not controlled by a single seller, and are much more common. Monopolies, even owning 99% of the market, cannot maintain their power for long. Over time, multiple divisions or mergers occur, which ultimately leads to competition between strong rivals.

A. Marshall, due to his reluctance to distinguish between perfect and less perfect competition, practically delayed the development of both the theory of competition and the theory of monopoly. However, the discrepancies between theory and reality were so obvious that the model of monopolistic competition was an immediate success in the 1930s. and extremely quickly entered the mainstream of microeconomic theory.

In monopolistic competition, firms have some control over price. Unlike the conditions of perfect competition, each individual producer, by changing the volume of products produced, can influence the price of his goods.

This is possible if competing firms sell non-standardized products. Possibilities differentiation goods by quality, appearance, reputation (trademark) and other characteristics give each seller a measure of monopoly power over price.

The detergent market, for example, offers many varieties. Monopolistic competition is the market for confectionery products, household appliances, etc. At the same time, firms face competition from existing firms or new firms entering the industry; the market is open for entry and exit.

Monopolistic competition- a market structure in which many sellers compete to sell a differentiated product in a market where new sellers may enter.

Main features of a market with monopolistic competition:

The product of each firm selling on the market (differentiated product) is an imperfect substitute for the product sold by other firms, but its cross elasticity must be positive and relatively large. Product differentiation arises due to differences in consumer properties, quality, service, and advertising. Often the consumer pays not only for quality, but also for the brand.
There are a relatively large number of sellers in the market, each of whom satisfies a small, but not too small, share of the market demand for the general type of product sold by the firm and its rivals. The company's share must be more than 1%. In a typical case, from 1 to 10% of market sales during the year. None of the firms has a decisive advantage over the others.
Market sellers do not consider the reactions of their rivals when choosing what price to set or how much to produce. This is a consequence of the fact that the number of sellers is large and the decision of one of them has little impact on the position of the others.
The market has conditions for free entry and exit. New firms can freely come, but existing firms have an advantage and new ones will experience difficulties, since it is not easy to gain a reputation for a new brand or new services.

Thus, monopolistic competition is similar to a monopoly, since individual firms can control the price, but it is also similar to perfect competition, since each product is sold by many firms and there is free entry and exit in the market.

7.4.1. DEMAND CURVE FOR THE PRODUCTS OF A MONOPOLISTIC COMPETITIVE ENTERPRISE

Since each competitor sells a different variety of a certain good from all others, it acts as a monopolist in relation to its group of regular customers. Therefore, the demand curve for his products has a negative slope and he himself determines the volume of his supply and price. But since the products produced by monopolistic competitors are easily interchangeable, the demand for the products of an individual competitor depends not only on the price of its products, but also on the prices of the products of other competitors.

Schedule for rice. 7.28 demonstrates differences in the behavior of enterprises under conditions of monopoly and monopolistic competition. rice. 7.28 line AB is the demand curve under complete monopoly, while the broken line CDEK is the demand curve under monopolistic competition.

The manufacturer feels like a monopolist only in the interval Q 2 Q 3. If he decides to reduce the volume to Q 1 so that the price is P 1 ", some buyers will go to

Rice. 7.28. Broken demand curve for products under monopolistic competition

competitors and the price will be set at the level P 1. Accordingly, when setting a low price P 4, the manufacturer expects to produce Q 4 ", but his competitors also reduced prices and he has to increase the volume to Q 4.

7.4.2. SHORT-TERM EQUILIBRIUM OF A FIRM UNDER MONOPOLISTIC COMPETITION

At what part of its demand curve a monopolistic competitor will choose the combination P, Q is determined by the Cournot point, and the firm is most likely to receive a monopoly profit if P>AC.

Thus, a firm with monopolistic competition behaves like a monopolist in the short term, as shown in rice. 7.29. The firm will produce Q MK units of output, focusing on the condition of profit maximization for the monopoly MC=MR, at the demand price for a given output P MK. The shaded area above the firm's average cost AC is the profit that the firm will earn in the short run.

7.4.3. LONG-RUN EQUILIBRIUM UNDER MONOPOLISTIC COMPETITION

However, in a market of monopolistic competition this cannot last long. Economic profit will attract other firms to this industry, which will begin to produce a similar product, or the firm itself, in the long term, trying to increase profits, can expand by building new facilities. This will lead to increase in supply this type of product and price reduction.

For example, if one firm offers whitening toothpaste, after determining profitability, other firms will offer similar toothpastes in the market. In the long run, the D and MR curves will shift downward for a given firm.

The long-run equilibrium in a market with monopolistic competition is similar to the equilibrium in perfect competition in that no firm earns more than normal profits ( rice. 7.30).

Thus, under conditions of monopolistic competition, as well as under perfect competition, the equilibrium price in the long run is equal to the average

costs and firms do not make economic profit. However, under monopolistic competition, products will not be produced at the minimum average cost as under perfect competition. Because of the negative slope of line D, it touches the LAG curve to the left of the LAG minimum.

Consequently, in long-run equilibrium, monopolistic competitors have excess production capacity, and because of this, differentiated goods are more expensive than standard ones. Shaded area on rice. 7.30- "payment for diversity." If the product were standardized and produced under perfect competition, then the condition P = MC = LAC min would be satisfied.

From the discrepancy between the estrus of long-term equilibrium and the point of minimum average costs, the following follows:

The market structure of monopolistic competition forces the buyer to overpay for the product. The payment for product differentiation is equal to the difference between the equilibrium price established under monopolistic competition and the price under perfect competition;
with monopolistic competition, a volume is established that is smaller than the volume of production with perfect competition;
Since at the point of long-run equilibrium the demand price is higher than the firm's marginal cost, there will be buyers who would agree to pay more for an additional unit of goods than the firm's costs would be. From the buyers' point of view, the industry is underutilizing resources to produce the volume of goods they need. However, increasing output will reduce firms' profits, so they will not do it.

Thus, the higher the degree of product differentiation, the more imperfect the competition in the market and the greater the deviation of the used capacities, production volumes and prices from the most efficient ones.

Free entry into the market prevents firms from making economic profits in the long run. If, after reaching equilibrium in the market with

Rice. 7.29. Equilibrium of a firm under monopolistic competition in the short run

Rice. 7.30. Equilibrium of a firm under monopolistic competition in the long run

monopolistic competition, demand will decrease, then firms will leave the market, since P

Advertising and other promotional activities are attempts by firms to increase demand for their product. If for a company in conditions of perfect competition advertising is not important due to the inability to influence the price, for a monopolist - due to the lack of competitors, then for a company in conditions of monopolistic competition it is the main weapon in the struggle for existence.

For example, according to Financial Newspaper, more than 10 domestic firms spend more than 1 million rubles on advertising in the press alone. These are companies such as Party, Vist, Samos, etc. Among the product groups, the most frequently advertised are: computers, electrical household goods, office equipment, audio, video equipment, cars, furniture, building materials, communications equipment.

Schedule for rice. 7.31 shows how a monopolistic competitor can increase its market share through advertising expenditures. Advertising costs increased the cost per unit of output (AC 1, AC 2), but at the same time the demand for the company's products increased (D 1, D 2), and as a result its revenue increased.

TR 2 = P 2 Q 2 > TR 1 = P 1 Q 1 .

Schedule for rice. 7.32 shows the profit received by the company after advertising in a short period. As already noted, significant costs are associated with advertising and other activities to promote a product to the market, therefore, the average cost for any release after an advertising campaign will be AC 2, respectively

The profit-maximizing output is now the one for which MR 2 = MC 2 . On the graph this is point K2, the output volume is Q2, and the price is P2, which corresponds to the demand curve D2. In the absence of any advertising, this firm would earn zero economic profit, as shown in the graph (point E at which P 1 = AC 1). Advertising allows a firm to generate positive economic profit (shaded area). However, this is only possible in the short term.

But since entry into the market of monopolistic competition is free, the positive profit received by the company as a result of additional advertising costs will attract new producers to the market who will produce a similar product and imitate the marketing program of the successful company. As a result, the demand and marginal revenue curves will shift downward. The combination of increased costs and reduced demand over a long period will reduce the resulting economic profit to zero ( rice. 7.33).

However, since advertising has served to increase demand for all sellers in a market with monopolistic competition and has contributed to the entry of new producers into the market, the total quantity of goods consumed increases and excess capacity is lower than it would be in the absence of advertising.

Prerequisites for imperfect competition

Since the second half of the 19th century. imperfect competition is gradually gaining ground. It is associated with the emergence of large economic entities (associations), which gradually began to subjugate an increasingly large part of industry markets. All this was accompanied by a process of concentration of production (the concentration of a large number of labor and production volumes in large enterprises). Under these conditions, the number of commodity producers is reduced and it becomes possible to influence the market price.

To a large extent, this was facilitated by the development of a corporate form of private ownership in the form of joint stock companies.

The emergence of various types of monopolistic type associations has qualitatively changed competitive relations.

New interpretation of monopoly

Non-price competition

Product differentiation acts as a kind of compensation for those disadvantages that are inherent in monopolistic competition and are associated primarily with the costs of functioning of such a market structure. At the same time, product differentiation, taken to the extreme of its manifestation, on the one hand, confuses the consumer, complicating the selection process, on the other hand, it can give rise to false guidelines in choice. Quite often, preference for some goods over others is given not on the basis of the actual quality and consumer properties of the product, but on the price, believing that the latter serves as the best indicator of the quality of the goods and services offered.

Product Improvement

Types of Relationships

Based on the concentration of sellers in the same market, oligopolies are divided into dense and sparse. Dense oligopolies conventionally include those industry structures that are represented on the market by 2-8 sellers. Market structures that include more than 8 business entities are classified as sparse oligopolies. This kind of gradation allows us to evaluate the behavior of enterprises in conditions of dense and sparse oligopoly differently. In the first case, due to the very limited number of sellers, various types of conspiracies are possible regarding their coordinated behavior on the market, while in the second case this is practically impossible.

Based on the nature of the products offered, oligopolies can be divided into ordinary and differentiated. An ordinary oligopoly is associated with the production and supply of standard products. Many standard products are produced under oligopoly conditions - steel, non-ferrous metals, building materials. Differentiated oligopolies are formed on the basis of the production of a diverse range of products. They are typical for those industries in which it is possible to diversify the production of goods and services offered. The level of density of an oligopolistic market structure is measured by the number of enterprises in a particular industry and their share of total industry sales within the national economy. Thus, by varying the number of enterprises, it is possible to determine the degree of concentration of production, and therefore supply, in the branch of social production under study.

At the same time, it should be emphasized that it would be imprudent to focus only on the scale of the national economy. Oligopolistic structures can be formed both at the regional and local levels of management. Thus, due to the specificity of the opportunities for consumption of ready-made concrete in local markets (district, small city), oligopolistic structures are also formed, as well as at the regional level in the supply of, for example, bricks.

However, no matter what level we consider oligopolies, we should not forget about two important points: inter-industry competition and imports of products. The strength of oligopoly decreases under the influence of the supply of products by enterprises in other industries that have approximately the same consumer properties as the products of oligopolists (for example, gas and electricity as a source of heat, copper and aluminum as raw materials for the manufacture of electrical wires). The weakening of the oligopoly is also facilitated by the import of similar goods or their substitutes. Both of these factors can contribute to the formation of more competitive structures compared to purely sectoral market structures.

The emergence of an oligopoly

The historical tendency for the formation of oligopolies is based on the mechanism of market competition, which with inevitable force forces weak enterprises out of the market through either their bankruptcy or absorption and merger with stronger competitors. Bankruptcy can be caused both by weak entrepreneurial activity of the enterprise's management, and by the impact of efforts made by competitors against a particular enterprise. A takeover is carried out on the basis of financial transactions aimed at acquiring a particular enterprise, either in whole or in part by purchasing a controlling stake or a significant share of capital. It is the relationship between strong and weak competitors. A merger is usually voluntary. Although this kind of centralization of capital and production may be economically forced, as a choice of the third of two evils: either a complete loss of independence, or an exhausting economic war.

Acquisition and merger processes allow companies to significantly increase their sales shares in the relevant market. The growth of the market power of several corporations makes price competition meaningless, which can turn into a price “war” and lead to exhaustion of all its participants.

Another significant factor in the formation of oligopolistic market structures is the desire of enterprises to realize economies of scale in production. In the process of improving technology and the emergence of new technologies, the optimal production size has reached such a scale that it has become a significant obstacle to the entry of new enterprises into the industry. These obstacles are associated both with limited finances, the achievement of low production costs, and a more rational use of resources by several business entities than by many competitors with insignificant production volumes.

The specifics of the oligopolistic market structure determine the characteristics of the market behavior of economic entities and pricing. Pricing in an oligopolized market is characterized by a variety of forms of its manifestation, but their grouping allows us to identify four basic principles: price competition; secret price collusion; price leadership; price cap.

Price competition

When there are a limited number of suppliers of a particular product, their behavior can be described in two ways. An increase or decrease in the price of a product by one of the producers causes an adequate reaction from competitors. In this case, the actions of competitors neutralize the price advantage that one of the business entities was trying to achieve. As a result, there is virtually no redistribution of total sales volumes between competitors; each competitor does not experience the loss of its customers. If there is an outflow or influx of buyers, this is felt by the industry as a whole under the influence of lowering or raising prices by all commodity producers. Depending on the direction of price movements, buyers will look for ways to satisfy their needs by increasing the volume of purchases of goods in this industry or in other industries.

In reality, depending on the specific circumstances, the behavior of competitors in response to the actions of one of the oligopolists can be very diverse. However, the most reliable reaction can be considered that a price reduction by one of the competitors will cause the others to try to equalize their prices, i.e. lower them in order to prevent the expansion of the sales market of the initiating competitor. At the same time, price increases by one of the commodity producers, as a rule, are ignored by competitors. This ignoring of price increases by competitors is associated with the hope of increasing their shares in total sales at the expense of the oligopolists who risked raising the price of their product. For clarity, let's look at Fig. 22.3, which shows the demand curves of an oligopolist.

Rice. 22.3. Broken demand curve of oligopoly

If we imagine that the demand curve C 1 C 1 expresses the position of the oligopolist in conditions when its competitors equalize their prices according to its prices, and the demand curve C 2 C 2 corresponds to competitors ignoring price changes for this oligopolist, then we can conclude that there is a broken demand curve With 2 AS 1 for an oligopolist in conditions of price competition. This kind of conclusion follows from the ambiguous reaction of competitors to a price increase or decrease by one of the oligopolists. If the price and output volume corresponding to point A are established, the position of the enterprise is characterized by an equilibrium state. However, if an enterprise decides to increase the price of its products, and its competitors do not react to this in any way, then the market position of the enterprise that decided to increase prices will be characterized by a segment of the demand curve C 2 A (the upper part of the demand curve C 2 C 2 ). As a result of the fact that demand has a relatively high elasticity in this segment, an increase in price will lead to a reduction in the company's sales volume, while its competitors will receive additional buyers.

But if the enterprise makes an attempt to lower the price, then the remaining oligopolists will immediately react by correspondingly lowering the prices for their products. In this case, the state of demand will be characterized by segment AC 1 (the lower part of the demand curve C 1 C 1, which has lower elasticity). And, therefore, lowering the price will not significantly increase sales volumes.

It should be noted that the marginal income curve also has an unusual shape: it also consists of two segments. The first segment of the marginal income curve corresponds to the demand curve C 2 C 2, the second - C 1 C 1. The presence of a turning point in the elasticity of demand at point A causes a break in the marginal income curve, i.e. a vertical segment BE of the marginal income curve appears D 2PREV VED 1PREV. This gap in the marginal revenue curve suggests that virtually any changes in marginal costs between the marginal cost curves AND 1PRED and AND 2PRED will not affect price and production volume, since the point of intersection of the vertical segment of the marginal revenue curve ( BE) with the marginal cost curve will indicate the invariance of the scale of production (Q A), maximizing profit.

The restrained nature of price competition is associated, firstly, with weak hopes of achieving market advantages over competitors, and secondly, with the risk of unleashing a “war” of prices.

Imperfect market behavior

The variant of the oligopolistic market structure considered above, which allows for the possibility of price competition, characterizes a sparse oligopoly, within which it is very problematic to coordinate the behavior of competitors due to their relatively large number. However, in cases where the market is characterized by a dense oligopoly, preference is given to non-price competition and there is a real possibility of producers of certain goods entering into a secret conspiracy.

In modern conditions, when, on the one hand, antitrust legislation is in force, and on the other, there are shortcomings and uncertainty in the market behavior of oligopolists based on price competition, there is a temptation for competitors to directly or tacitly consent to unidirectional market behavior. Establishing secret price controls allows oligopolists to reduce uncertainty, generate economic profits, and prevent new competitors from entering the industry.

Collusion

Due to the fact that many countries have antimonopoly (antitrust) legislation, open cartelization based on written agreements becomes impossible. In such cases, agreements are concluded informally and verbally in confidential meetings. In this case, sophisticated forms of camouflage for the coordinated actions of oligopolists are used. As a result, consumers, observers and regulatory authorities create the illusion of price competition between oligopolists.

The most sophisticated form of secret conspiracies are the so-called gentleman's agreements, which are concluded verbally in a relaxed atmosphere outside of working hours and which are very difficult to identify for the purpose of bringing a claim. Of course, secret price agreements require their participants to have mutual trust and a willingness to make compromises and concessions in order to balance the interests of the participants. Differences in costs and differences in target settings determine the far from identical market behavior of oligopolists. Within the framework of secret agreements that actually block price competition, non-price forms of competition may develop, accompanied by the provision of hidden discounts and additional services, improving forms of customer service, and providing the best after-sales service.

Leadership in prices

Price leadership is one of the forms of market behavior of oligopolists, in which all competitors in a given market follow in the wake of the pricing policy of the leading or dominant oligopolist. The point is that the largest or most efficient company in the industry chooses the right moment and place to change the price, while all other oligopolists automatically follow this change.

When we talk about price leadership, we assume that there are no agreements or agreements between enterprises. And yet, the coordination of the actions of oligopolists, despite its camouflaged nature, in a certain sense occurs openly. The price leader, publicly expressing certain intentions regarding the proposed price change, seems to provoke a reaction from other commodity producers. The response of competitors to the industry leader's probing serves as a kind of signal to implement or refrain from certain activities.

The peculiarity of the behavior of a price leader is that, as a rule, it does not react to minor fluctuations in the conditions of costs and demand. Price changes occur only if there are noticeable deviations in the cost of certain factors of production or changes in the operating conditions of the enterprise or production output.

Price cap

Finally, the price in an oligopolized market can be formed based on the average total production costs, to which a markup is usually added in the amount of a certain percentage. In the future, we will use the term “average costs”, which in the long term should be understood as the totality of costs, since dividing them into constant and variable is acceptable only for the short term.

The estimated price, formed on the basis of average production costs and a certain percentage mark-up as economic profit, serves as a kind of standard price for conducting a pricing policy, which is designed to take into account actual or possible competition, financial, economic and market conditions, strategic goals and other circumstances. This kind of pricing form is mainly characteristic of enterprises with a high degree of differentiation and diversification of their products, which become a significant obstacle to accurately determining demand and costs for each individual product.

The preference given to oligopolies and the deployment of non-price competition over price competition is due to the fact that updating products, modifying them, improving production technologies, and successful advertising make it possible to create sustainability and stability in the market compared to price competition. The latter can lead to significant costs and exhaustion of competitors, and sometimes to an increase in monopolistic tendencies in the market. In extreme cases, the consequence of price competition may be a transition from a sparse oligopoly to a dense one, which opens the way to direct collusion among competitors. Another reason for the preference for non-price competition is due to the large scale of production of oligopolists and significant financial resources that allow them to carry out activities caused by non-price competition.

General assessment of oligopolistic structures

Assessing the significance of oligopolistic structures, it is necessary to note, firstly, the inevitability of their formation as an objective process arising from open competition and the desire of enterprises to achieve optimal scales of production. Secondly, despite both positive and negative assessments of oligopolies in modern economic life, one should recognize the objective inevitability of their existence.

Positive and negative aspects of oligopoly

A positive assessment of oligopolistic structures is associated primarily with the achievements of scientific and technological progress. Indeed, in recent decades, in many industries with oligopolistic structures, significant progress has been made in the development of science and technology (space, aviation, electronics, chemical, oil industries). Oligopolies have enormous financial resources, as well as significant influence in the political and economic circles of society, which allows them, with varying degrees of accessibility, to participate in the implementation of profitable projects and programs, often financed from public funds. Small competitive enterprises, as a rule, do not have sufficient funds to implement existing developments.

The negative assessment of oligopolies is determined by the following points. This is first of all that an oligopoly is very close in structure to a monopoly, and therefore, one can expect the same negative consequences as with the market power of a monopolist. Oligopolies, by concluding secret agreements, escape the control of the state and create the appearance of competition, while in fact they seek to benefit at the expense of buyers. Ultimately, this results in a decrease in the efficiency of using available resources and a deterioration in meeting the needs of society.

Oligopolies and small business

Despite significant financial resources concentrated in oligopolistic structures, most new products and technologies are developed by independent inventors, as well as small and medium-sized enterprises engaged in research activities. However, only large enterprises that are part of oligopolistic structures often have the technological capabilities to practically implement the achievements of science and technology. In this regard, oligopolies use the opportunity to achieve success in the field of technology, production and market based on the developments of small and medium-sized businesses that do not have sufficient capital for their technological implementation.

In general, when attention is paid to assessing the effectiveness of oligopolies, it is noted that the latter are often interested in restraining scientific and technological progress, since they are in no hurry to introduce the emerging “new products” until the necessary profit on the previously invested large capital is achieved . This policy prevents obsolescence of both machinery and equipment, as well as technologies and products.

conclusions

3. In the market of monopolistic competition, in addition to price competition, there is also non-price competition, which is expressed in product differentiation, its improvement and advertising. Product differentiation is manifested in the offer of the same product with a diverse combination of its consumer properties, which allows expanding the class of buyers. Product improvement is associated with maintaining the price level for it while simultaneously improving technical, economic, quality characteristics and consumer properties. Advertising is the most pronounced form of non-price competition in conditions of monopolistic competition compared to other types of market structures.

4. Oligopoly is a market structure that occupies an intermediate position between monopoly and monopolistic competition (the number of participants is from 2 to 24). Oligopolies are characterized by varying degrees of density: from 2 to 8 enterprises - a dense oligopoly, from 9 to 24 - a sparse one. The formation of oligopolistic structures is the result of competition, accompanied by acquisitions and mergers.

5. Within the framework of price competition between oligopolistic enterprises, their behavior is characterized by two specific points: when one of the oligopolists lowers the price, all the others also jointly lower prices in order to retain their “fixed” market segment; when prices increase, the remaining oligopolists maintain the same price level and thereby can squeeze out the enterprise that has risked raising prices in the market.

6. Among the types of non-price competition, we should highlight secret collusion, price leadership, and price markup. The secret conspiracy of oligopolists is aimed at implementing a single pricing policy by its participants, at dividing markets, or at simulating price competition. Price leadership means that all oligopolists, following the lead company (leader) in a given industry, increase or decrease prices. The price cap is used by those oligopolists whose products are quite differentiated, which makes it difficult to conduct separate cost calculations for each individual product. Therefore, they add the corresponding amount of profitable premium to average costs.

is one of the types of market structure in which a large number of enterprises produce differentiated products. The main feature of this structure is the products of existing enterprises. They are very similar, but not completely interchangeable. This market structure gets its name because everyone becomes a small monopolist with their own special version of the product, and because there are many competing firms producing similar products.

Main features of monopolistic competition

Differentiated products and a large number of competitors;
A high degree of rivalry ensures price, as well as fierce non-price competition (advertising of goods, favorable terms of sale);
The lack of dependence between companies almost completely eliminates the possibility of secret agreements;
Free opportunity to enter and exit the market for any enterprise;
Decreasing, forcing you to constantly reconsider your pricing policy.

In the short term

Under this structure, up to a certain point, demand is quite elastic with respect to price, however, the calculation of the optimal level of production to maximize income is similar to a monopoly.

Demand line for a certain product DSR, has a steeper slope. Optimal production volume QSR, allowing you to get maximum income, be at the point of intersection of marginal income and costs. Optimal price level P SR, corresponds to a given volume of production, reflects demand DSR, since this price covers the average and also provides a certain amount.

If the cost is below average costs, the company needs to minimize its losses. In order to understand whether a product is worth producing, it is necessary to determine whether the price of the product exceeds . If the variable costs are higher, then the entrepreneur should produce the optimal volume of production, since it will cover not only the variable costs, but also part of the fixed costs. If the market value is lower than variable costs, then production should be delayed.

In the long run

In the long term, profit margins begin to be affected by other companies that have entered the market. This leads to the fact that aggregate purchasing demand is distributed among all companies, the number of substitute goods increases and the demand for the products of a particular company decreases. In an attempt to increase sales, existing companies spend money on advertising, promotion, improving product quality, etc., and, consequently, costs increase.

This market situation will last until the potential profits that attract new companies disappear. As a result, the company is left with both no losses and no income.

Cost-effectiveness and disadvantages

The monopolistic competition market is the most favorable option for buyers. Product differentiation provides a huge selection of goods and services for the population, and the price level is determined by consumer demand, not the enterprise. The equilibrium price in monopolistic competition is higher than marginal costs, in contrast to the level of product prices that are set in a competitive market. That is, the price that consumers of additional goods will pay will exceed the cost of their production.

The main disadvantage of monopolistic competition is the size of existing enterprises. The rapid occurrence of scale-up losses significantly limits the size of firms. And this creates instability and uncertainty market conditions and small business development. If demand is insignificant, firms may suffer significant financial losses and go bankrupt. And limited financial resources do not allow enterprises to use innovative technologies.

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