The theory of Monopolistic competition was foremost introduced in 1930 by American Economist Prof. Edward Chamberlin, which was planned on the footing of mixture of competitory and monopolistic theories. He suggests that “ to see the theory of monopolistic competition mistily as a theory of imperfect competition is to confound the issues ” ( www.transtutors.com ) . The monopolistic competition can besides be considered as a first type of imperfect competition.
Monopolistic competition is that market construction which is specified by big figure of little houses and there is intense competition between big figure of providers and manufacturers, the goods sold by all the houses are quite same but they are non equal, ample information on monetary values and engineering, with comparative freedom of entry into and manner out of the industry. They have some sum of monopoly because of their different types of merchandises. Hence it is a mixture of some sum of monopoly influence and perfect competition. The illustrations of monopolistic competition are eating houses, vesture shops, retail shops and flats.
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Monopolistic competition in the short tally:
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In the short tally under monopolistic competition the net income is maximised by a company and industries merchandises to an extent when the company ‘s fringy cost ( MC ) is equal to fringy gross ( MR ) . In the above diagram there is downward sloping of demand curve because the monetary value of all the units are non similar as in the instance of perfect competition where norm gross ( AR ) is tantamount to monetary value. On the footing of the mean cost ( AC ) and mean gross ( AR ) curve the net income is gained by the company.
Monopolistic Competition in the Long Run:
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In the long tally under monopolistic competition both entry and issue are possible for the houses. The supply of distinguished merchandises will lift with the entry of new houses which causes the house ‘s demand curve to switch left. When there will be more entry of houses in the market the demand curve will go on switching towards the left as there will be more competition among the houses. No thirster will an economic net income be claimed by the houses. Therefore in the long tally under monopolistic competition each house will gain normal net income due to the competition brought with the entry of new houses.
The market for mp3 participant as an illustration of Monopolistic Competition:
In a monopolistic competition there is freedom of entry into and manner out of the industry likewise there are no barriers for entry and issue in the mp3 market. There are many Sellerss in the mp3 participant market and an intense competition goes on between them. They compete with each other on the footing of monetary value and the quality of their merchandises without impacting the market topographic point.
In the short tally the market for mp3 participant was taken by Apple iPod as they were the first entrants and no rivals were at that place. The entire economic net income was gained by them.
But in the long tally many new houses together with the nomadic phone manufacturers enters the mp3 market which causes the demand curve to switch towards left and zero economic net income is earned by every houses. Each of them produces their ain merchandises which are somewhat different from the others. They compete with each other on the footing of monetary value and quality.
It can be argued on the footing that few other houses are ruling the market of mp3 participants like Apple, Microsoft and Sony, but as there is no mutuality on monetary values there is no oligopoly. As a consequence the market of mp3 participant can be considered as an illustration of monopolistic competition.
The effects on the Apple Ipod of increased competition from other houses successfully come ining the market:
In the twelvemonth 2001 Apple introduced its first iPod in the market. By the twelvemonth 2006 assorted other houses like Microsoft and nomadic phone companies entered the market of mp3 and gave apple some competition. In order to remain in the competition Apple often reorganized the iPod.
Figure 1 ( www.personal.psu.edu ) Figure 2 ( www.intereconomics.com )
In figure 1, the graph shows the conditions that were faced by Apple in the twelvemonth 2005. The Marginal Curve for the Apple iPod is MC and the Average entire Cost Curve is ATC. The Marginal Revenue curve for the Apple iPod is MR and the demand curve is D. At that clip the apple iPod had kept the competition with other mp3 participants aside as there was no other participant to vie with them.
In the twelvemonth 2006, many new houses together with the nomadic phone manufacturers made a successful entry into the mp3 market. Every houses produces mp3 participants which are small different from others. On the footing of monetary value, quality and marketing the houses contend with each other. The demand of the Apple iPod becomes elastic as the entry of other mp3 participants decreases the demand of Apple iPod.
In figure 2 the graph shows the status of Apple iPod after the successful entry of other houses. Here besides the mean entire cost of Apple iPod is LRAC and the fringy cost is LRMC. The Marginal Revenue Curve has shifted to MRE? and the Demand Curve has shifted to DE? . As both the monetary value and the mean entire cost are indistinguishable so 0 economic net income is earned on Apple iPods. Therefore the sale of apple iPods decreases up to some extent after the entry of other houses.
In decision after analyzing the market for mp3 participants it is seen that in the short tally the market for mp3 participant there is some sum of monopoly as Apple was the lone manufacturer of iPods but after few old ages other new houses came into the mp3 market which resulted in the lessening in gross revenues of apple iPods. As a consequence in the long tally zero economic net income was shared by every houses. Because of the competition apple once more modifies its merchandise and brings new apple iPod picture in the market. Once once more Apple returns to the first status as there was no other picture participants to vie with them but it did n’t last long shortly other houses together with the nomadic phone manufacturers makes an entry into the market with video capableness and once more the economic net income earned by every house becomes zero.