Unit 6: Market Structures
Lesson 6.4: Monopolistic Competition
What You Will Learn!
• Monopolistic competition is a market structure where many producers supply
similar but differentiated products. SS.912.E.1.6.
• Producers in monopolistic competition compete through non-price
competition. SS.912.E.1.8, SS.912.FL.2.3, SS.912.FL.2.4.
Key Point #1. Monopolistic competition is a market structure where many
producers supply similar but differentiated products.
The last market structure, monopolistic competition, resembles most of our
economy here in the United States. Monopolistic competition is a market structure
where many producers supply similar but differentiated products. In Lesson 6.3, we
talked about differentiation, which is the process of making a product different from
another. Typically this means the same type of good, like cell phones, Italian food, or
running shoes, but with enough differences to be able to identify one producer’s product
from another, for example, the swoosh on Nike’s shoes vs. the three stripes on Adidas
brand.
Many producers. In monopolistic competition, like in perfect competition, there
are lots of different producers of a particular product. In New Smyrna Beach alone,
according to UrbanSpoon, there’s like 15 different hamburger joints, and that’s only the
ones that are listed. When you drive along the interstate, and approach an exit, there’s
at least two to six gas stations at practically every one. Publix, Winn-Dixie, Bravo, and
Save-A-Lot are just some of the grocery stores we have in Volusia County, and there
are dozens more nationwide. Every one of these restaurants, gas stations, and grocery
stores compete with each other for your dollars.
Differentiated products. In this case, we’re talking about the same type of
product, but the producers have made their product different somehow so that you can
identify it from another producer’s. For example, cheeseburgers vary from place to
place in terms of quality, in terms of price, in terms of the atmosphere of the restaurants
that serve the juicy meaty sandwiches. From your experience, you can recognize the
difference between a Big Mac served at McDonald’s, with an all-beef patty, special
sauce, lettuce, cheese, pickles, onions on a sesame seed bun, vs. a Chili Cheeseburger
at Breakers, with chili, obscene amounts of cheese, onions, all on top of a ½ pound of
ground beef served on a Kaiser roll. Nonetheless, both of them are essentially
cheeseburgers.
Free entry and exit.
Like in
perfect competition, there are no real
barriers to entry into the market beyond
start-up costs to open and maintain the
business, and those costs tend to be low.
In fact, entrepreneurs have been really
creative in cutting costs recently as they
enter these markets. For example, to
enter the restaurant business, instead of
the traditional brick and mortar building,
some young chefs have been turning to food trucks. Restaurants with excellent food,
1
Unit 6: Market Structures
Lesson 6.4: Monopolistic Competition
sometimes exotic, and located in out-of-the-way locations, have suddenly been popping
up, from bakeries to Korean food. At the same time, nothing is really stopping these
businesses from leaving the industry. If the Muffin Man decides to stop making muffins,
and go into something else, he can do so without any restrictions.
Some control over price. Let’s preface this by stating why this structure is
called monopolistic competition. When we say monopolistic competition, we do not
mean that there are monopolies competing with each other. If you understand how
many producers are in a monopoly, you also understand why that idea is ridiculous, and
hopefully chuckled to yourself about how awesome you are. Actually, when we use
“monopolistic” in this sense, what we mean is the ability to control prices. Individual
producers can control how much they supply to the market. Because they can control
the supply, they can also have some control over price. That sounds bad, considering
what we learned about how monopolists control supply. However, the difference
between monopoly and monopolistic competition is that there is competition. That
competition limits how much one single producer can control price. Now that should
sound more like perfect competition, and that should sound good. However, unlike in
perfect competition, in monopolistic competition, the products are different from one
another in terms of style, convenience, brand, features, and more. So in that case, a
consumer can’t just go to another producer and get the same tablet computer. Apple
iPad’s features are different from those of the Microsoft Surface.
Market Structure Characteristics
Perfect
Monopoly
Oligopoly
Competition
Number of
Producers
many
Product
Similarity
Monopolistic
Competition
one
few
many
identical,
commodities
unique
commodity
(industry);
differentiated
(consumer)
differentiated
Entry and Exit
free
difficult to
impossible
difficult
free
Control over
Price
none
complete
some
some
Now let’s take a look at our Market Structures Characteristics table one more
time. Remember, perfect competition is our ideal, our model. It’s what we look at when
everybody is behaving themselves, and it’s what we use to compare against other
market structures. Perfect competition is the most competitive structure with lots of
competitors and no control over price. Producers have no control over price because
the products are identical, and the large number of competitors limits the market power
of an individual producer to change price. Consumers can just go to another producer
for the same product if the price is too high. Coming in and going out of the market isn’t
difficult as there are no real barriers to entering into a perfectly competitive market.
Monopoly, on the other hand, is the opposite extreme—it is the least competitive
structure. In this case, control of the entire market is in the hands of one producer, and
2
Unit 6: Market Structures
Lesson 6.4: Monopolistic Competition
the product they’re making is something that people need and will pay just about any
price for. Because monopolists control the supply of the product, they have complete
control over price, and manipulate price by limiting supply. This is anti-competitive
behavior, and limits innovation while creating higher prices. Getting into the same
industry as a monopoly is practically impossible, either because the monopolist controls
the entire resource or product—it is the industry, or because the government has
granted the firm a monopoly in some form, such as a natural monopoly, patent, or
franchise.
Oligopoly and monopolistic competition are the middle ground. In oligopoly,
there are a handful of producers producing the same product (industrial) or a
differentiated one (consumer), depending on the market. Because there is some
competition, oligopolists are not able to manipulate price in the same way as
monopolists. However, the market share of the oligopolists do allow them to have some
influence over price. Oligopolists can agree to set price and production amongst each
other, but this type of collusion between oligopolists is illegal. Collusion tends to raise
prices and stop improvements on products. Although not impossible to enter the
industry, because the businesses in oligopoly control so much of the market, it makes it
very difficult to do so. Similarly, exiting the industry comes with a high cost because of
the amount of investment involved in starting up. Compare that to monopolistic
competition, which most resembles the businesses in the U.S. economy. In this market
structure, there are many producers making similar, but different, products. Because
these producers can control the supply of their product, they can influence the price of
what they sell. However, the amount of competition limits how much a producer can
change their price. At the same time, because the products are not identical,
consumers can’t just switch from one company to another for the same thing. Like in
perfect competition, there are no real barriers to entry or exit. Monopolistic competition
is the market structure that is most like perfect competition.
Key Point #2. Non-price competition is the use of something other than price
to get customers to buy a product.
So in monopolistic competition, there’s lots of competitors and they change price.
Generally, a good way to get customers to buy your product is to have a sale and lower
price. That’s great and all, but do you really want to have a sale every day? If you
opened an umbrella stand on the beach, to get beachgoers to buy your umbrellas, you
probably don’t want to have to keep lowering your price to sell your stuff. At some point,
you would want to get people to buy your stuff at the higher price. How do you do that?
The solution is non-price competition. Non-price competition is the use of something
other than price to get customers to buy a product. Generally, businesses practice nonprice competition through physical characteristics, service, location, and style.
3
Unit 6: Market Structures
Lesson 6.4: Monopolistic Competition
Physical characteristics. This is where product
differentiation comes in handy. A computer is a computer
is a computer, correct? If that’s the case, why aren’t all
computers a plain black rectangular box with keyboard
and monitor? The answer, of course, is that not all
computers are the same. Computer companies design
their computers to be recognizable.
Dell, ironically
designs their computers as the black rectangular box, but
Apple chooses a polished chrome. Companies will not
only differentiate the products from those of other
companies, but they’ll also differentiate products within
their own company. Sony, for example, makes a variety
of televisions of all different sizes. Those different sizes
are not just for different purposes, like a small television in
the kitchen to watch while cooking, or a giant 84” HDTV to
yell at during football games, but also for different
budgets. This goes back a bit to price discrimination, and
trying to capture more money. A student will have a different budget from LeBron
James, a random basketball player. That doesn’t mean that Sony doesn’t want both of
their dollars. Similarly, companies tend to design products that “go together,” like
computers and printers. Businesses create entire constellations of products that
consumers can buy into.
Service. Some companies will differentiate themselves and their product by the
services they offer with the product. Customer support has become very important to
Americans as they gobble up more and more electronics. By having a reputation of
being extraordinarily helpful when there’s a problem, that can serve as a selling point for
the product, even if the price is high. And when it comes to service, reputation is
important. There’s an old business saying, “Make one customer happy, they’ll tell one
person. Make one customer unhappy, they’ll tell ten.” Think about the last time you
had bad service. How many people did you tell?
Location. In real estate, the thing that matters most in property is location,
location, location. You can say something similar about businesses as well. If Best Buy
was located out halfway between DeLand and Daytona Beach out in the middle of
nowhere on US 92, you would more than likely find a store a bit more convenient to you.
And that’s the point. It’s why Best Buy is located on International Speedway Boulevard
instead of cow country. Places with lots of traffic offer accessibility for customers.
International Speedway, Flagler Avenue, 17-92—these are the major thoroughfares of
our communities, and where we often take our business. Being in a decent location can
make or break your business.
Style. Why do people buy Hollister T-shirts over Fruit of the Loom? Coca-Cola
over Pepsi? Ford over Chevy? A sports drink supported by scientific research versus
Gatorade promoted by Drew Brees? Consumers tend to buy things that are popular
and look shiny. Sure, a plain white T-shirt will do the job, but that tiny maroon seagull
just makes that T-shirt better somehow. Don’t even get me started on the difference
between the Playstation 4 and Xbox One. Much of this style is actually created by
advertising. Companies spend an enormous amount on advertising to not highlight the
4
Unit 6: Market Structures
Lesson 6.4: Monopolistic Competition
differences in their product, but to make sure that you—the consumer—know that those
differences is what makes their product better, shinier. In fact, advertising agencies
spend billions of dollars in the U.S. and around the world on your specific age group, 18
to 24 year olds. Part of this is to, of course, get your money, but the other part is to
attract you as a lifelong customer. On Facebook alone, companies spend hundreds of
millions of dollars to attract your business.
5