Monopolistic competition graph , characteristics & examples

We can identify four major types of market structures. They are perfect competition, monopolistic competition, oligopoly, and monopoly. To see them, kindly click here.

In this study, we will presents the monopolistic competition definition, monopolistic competition charasteristics, monopolistic competition graphs and monopolistic competition examples.

What is Monopolistic Competition? (Monopolistic Competition Definition)

The market that many competitive firms sell products but each company sells different products from others is called as monopolistic competition market.

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Oligopoly: Definition, Characteristics and examples

Monopoly Graph, Characteristics, Types, Examples and Causes

Monopolistic Competition Charasteristics

In the monopolistic competitive market,

• A large number of companies are operating. Because there is a lower level of barriers to entry and exit from the market.
• Since there is a large number of companies are operating, each company has a small market share. So no company has a monopoly power to control the market price and output.
• But each company works independently and does not much consider the actions of the other companies. In other words, there is no perfect competition and there is imperfect competition.
• Because companies in the monopolistic competitive market produce differentiated products which have differences but substitutes for the others products.
• Companies compete not only based on the price, but also they compete based on the quality of the products, market strategies that they use, and so on. So, companies in monopolistic competition must invest in product development to increase the quality of the products and advertising to increase customer awareness.

Monpolistic Competition Graph

Monopolistic Competition Graph – Profit in the Short Run

A monopolistic competitive company can earn economic profit or supernormal profit in the short run. To read more about the short run, kindly click here. In the short run, monopolistic competitive companies produce with an excess capacity. Monopolistic competition graph in short run will present as follows.

According to the above graph 1 at point E, marginal cost (MC) equals marginal revenue (MR). The amount of quantity that relates to this point (E) is Qf units. So, the firm produces Qf units. At the Qf units of production, the average cost per unit (AC) is “B” and the average revenue per unit (AR) is “A”. We can see that here AR is greater than the AC. So, we can calculate the total profit of the firm by multiplying the number of Qf units from the difference between AR and AC. In other words, ABCD rectangular area presents the amount of supernormal profit of the firm.

Monopolistic Competition Graph – Profit in the Long Run

monopolistic competitive companies earn zero economic profit in the long run. To read more about the short run, kindly click here. New companies see the economic profit of the existing firms in the short run and as a result of the lower level of market entry barriers, new firms enter the market. Then the market output is increased and the market price is reduced. These firms eliminate the economic profits of existing firms and some firms in the market earn economic losses in the short run. So, firms who earn economic losses exit from the market, and in the long run all the firms earn zero economic profit. Monopolistic competition graph in long run will present as follows.

According to the above graph, at point C, marginal cost (MC) equals marginal revenue (MR). The amount of quantity that relates to this point (C) is Qf units. So, the firm produces Qf units. At the Qf units of production, the average cost per unit (AC) is “B” and the average revenue per unit (AR) is also “B”. We can see that here AR equals to the AC. So there is no any economic profit or economic loss for the particular organization.

How monopolistic competition examples fit to market charasteristics?

As an example for the monopolistic competitive company, I have selected the “Kayra Authentic Kerala Cuisine” which operates in the Malaysian hotel, restaurant, and institutional (HRI) industry. This is an industry which have fast growth and which contributes a higher portion to the Malaysian GDP.

• There are lower levels of barriers to entry and exit from the HRI industry. As examples we can say, there is a lower level of resource control, rules, and regulations, patents, copyrights, economies of scale in this industry. Ministry of Agriculture and Food Industries in Malaysia (MAFI), Ministry of Health Malaysia (MOH), Ministry of Domestic Trade and Consumer Affairs in Malaysia provide rules and regulations for this industry (Flanders Investment & Trade, 2020). But these rules and regulations do not create a higher level of barriers to entry and exit from the market. 
• HRI industry of Malaysia comprises a large number of companies. In the year 2010, there were 130,570 firms in the food and beverage industry and it has increased up to 167,490 firms, in the year 2020 (www.dosm.gov.my, n.d.).
• So as a firm that operates in the HRI industry, Kayra Authentic Kerala Cuisine” does not have a monopoly power to control the market price and output.
• This company works independently and does not much consider the actions of the other restaurants such as Gooddam, Fuego, Akâr Dining, and so on.
• HRI industry of Malaysia comprises different types of food traditions. In other words, there is a higher level of product differentiation. As examples, we can say traditional Malaysian foods, Chinese foods, Thailand foods, American foods, French foods, Indian foods, and so on. Among them, “Kayra Authentic Kerala Cuisine” is an Indian restaurant that provides different types of food menus such as different rice menus, short eats, desserts, drinks, and so on.
• As a competitive strategy, this company always provides higher-quality foods for consumers.