Which of the following characteristics of a monopolistically competitive market?

Monopolistic Competition and Oligopoly

Inhaltsverzeichnis Show

What are Monopolistic Markets?
Characteristics of Monopolistic Markets
Causes of the Emergence of Monopolistic Markets
Government Regulation
Which of the following is the characteristics of a monopolistically competitive market?
Which of the following are characteristics of a monopolistically competitive market quizlet?

So far, we have discussed two market structures, pure competition and monopoly. These are the two extremes. Pure competition is the most competitive, and monopoly the least competitive. The two market structures discussed in this unit are in between these two extremes. We will first discuss monopolistic competition. Then we will discuss oligopoly in a later section.

Characteristics of Monopolistic Competition

Four characteristics of a monopolistically competitive industry are:

1. Many sellers.
There are many sellers in this industry. Thus, there is a lot of competition.

2. Easy entrance.
Firms in monopolistic competition are small. It’s relatively easy for new firms to enter this industry and for existing firms to exit. Barriers to entry and exit are low.

3. Differentiated products.
Firms in this industry sell differentiated products. Unlike in perfect competition, products are not identical.

4. Local Advertising.
Firms in this industry frequently advertise. Because the firms are small, this is usually done on a local level.

Characteristics 1 and 2 are the same as in perfect competition. Characteristic 3 means that firms in this industry sell products that are similar but slightly different. The difference may be in the packaging of the product, the ingredients, the service associated with the product, the name of the product, etc. It is also possible that there may not be real differences, but only perceived differences by consumers.

Advertising (characteristic 4) helps to emphasize these differences to consumers.

Characteristics 3 and 4 usually result in competitors charging slightly different prices for their products. Competitor A may charge $5.49, while competitor B charges $5.29. Firms have some control over the price, and the demand curve is, therefore, downward sloping for each firm.

Examples of Monopolistically Competitive Industries

The following are examples of monopolistically competitive industries:

Retail clothing stores
Retail shoe stores
Gas stations
Fast food restaurants
Car dealers
Pizza restaurants
Financial consulting services
Legal services
Medical and dental offices

Markets where a certain product or service is offered by only one company

What are Monopolistic Markets?

Monopolistic markets are markets where a certain product or service is offered by only one company. A monopolistic market structure has the features of a pure monopoly, where a single company fully controls the market and determines the supply and price of a product or service. Hence, a monopolistic market is a non-competitive market.

Summary

Monopolistic markets exist when there is a single supplier for a good or service.
The absence of competition in a monopolistic market allows the firm to determine the price and quantity of a product or service.
A monopolistic market arises when a company controls a crucial resource, experiences increasing returns to scale, low elasticity of demand, and has technological superiority.

Characteristics of Monopolistic Markets

In a competitive market, numerous companies are present in the market and supply identical products. Its demand curve is flat, whereas, in a monopolistic market, the demand curve is downward sloping. Companies that are operating in a competitive market can sell any desired quantity at the market price.

The following are the characteristics of a monopolistic market:

1. Single supplier

A monopolistic market is regulated by a single supplier. Hence, the market demand for a product or service is the demand for the product or service provided by the firm.

2. Barriers to entry and exit

Government licenses, patents, and copyrights, resource ownership, decreasing total average costs, and significant startup costs are some of the barriers to entry in a monopolistic market.

When one supplier controls the production and supply of a certain product or service, other companies are unable to enter the monopolistic market. If the government believes that the product or service provided by the monopoly is necessary for the welfare of the public, the company may not be allowed to exit the market.

Generally, public utility companies – such as electricity companies and telephone companies – may be prevented from exiting the respective market.

3. Profit maximizer

In a monopolistic market, the company maximizes profits. It can set prices higher than they would’ve been in a competitive market and earn higher profits. Due to the absence of competition, the prices set by the monopoly will be the market price.

4. Unique product

In a monopolistic market, the product or service provided by the company is unique. There are no close substitutes available in the market.

5. Price discrimination

A company that is operating in a monopolistic market can change the price and quantity of the product or service. Price discrimination occurs when the company sells the same product to different buyers at different prices.

Considering that the market is elastic, the company will sell a higher quantity of the product if the price is low and will sell a lesser quantity if the price is high.

Causes of the Emergence of Monopolistic Markets

A monopolistic market comes into existence because of the following reasons:

A company controls a key natural resource and may restrict the resource supply to other companies. Thus, it controls the final price in the market.
The company is given the right by the government for the exclusive production of a product or service.
The increasing returns to scale may lead to one supplier becoming more efficient than the others. This results in a natural monopoly.
The absence of a substitute product or service; hence low demand elasticity allows a company to charge prices higher than the marginal cost
Technological advantages and innovation may sometimes result in monopolistic markets.
Legal barriers comprising copyrights, licenses, patents

Government Regulation

As difficult as it is to replicate a perfectly competitive market in reality, it is equally impossible to replicate a monopolistic market model.

Usually, the government grants monopolies to public utility companies – telephone, natural gas supply, and power generation. However, the government may regulate the monopolistic market to prevent monopolies from setting excess prices.

Also, in a monopolistic market, the company may not maintain quality service. Hence, government regulation ensures that the company follows the minimum service standard required.

The government can regulate a monopolistic market through the following:

Limiting price increases
Merger regulation
Separating monopolies
Investigating unfair practices and cartels
Ownership by the government – nationalization of the firm

Related Readings

Thank you for reading CFI’s guide to Monopolistic Markets. To keep learning and developing your knowledge base, please explore the additional relevant resources below:

Free Economics for Capital Markets Course
Natural Monopoly
Monopolistic Competition
Market Saturation
Price Discrimination
See all economics resources

Which of the following is the characteristics of a monopolistically competitive market?

Monopolistic competition portrays an industry wherein many firms offer services and products that are comparable (however noticeably flawed) substitutes. Barriers to exit and entry in a monopolistic cutthroat industry are low, and the choices of any one firm don't straightforwardly influence those of its rivals.