how to do the following question:
select an example from real life and explain the features of monopolistic competition based on it?
Monopolistic competition is a market structure which shares the feature of both perfect competition and monopoly.
It is monopoly + competition. Monopoly in the sense that a firm has full control over the brand name and trade mark and competition in the sense that other firms are making the same product and thus competing with each other.
Monopolistic competition refers to the market situation in which there is a large number of firms which sells a differentiated product. For example in Indian market different firms and companies are selling a different product like textiles, soap, toothpaste, t.v etc.
Features of monopolistic competition are as follows:
1. A large number of buyer and seller selling closely related but not homogeneous goods. Each firm has a limited share or control over the market. A large number of firms leads to competition in a market.
2. The products of a seller are differentiated but closely substitute of one another.
3. Under this type of market, firms are free to enter and free to exist from the industry. Also, firms do no incurrsany abnormal profit not incur any abnormal losses in long run.
4. Under this type of market firms are neither price taker nor they are a price maker. However, they access partial control over price by differentiating their products.
5. Selling cost of product exists in monopolistic competition market because every firm advertises there a feature of a product to customers so sale promotion expenses, advertisement expenses do exist in this.
6. Non-price competition is there because firms offer free gifts, extra products, etc to there customers without reducing the price.
7. Both AR and MR curve are downward sloping because in order to sell more price is reduced. MR is less than AR.