Advantages of Monopolistic Competition

Monopolistic Competition

The model of monopolistic competition describes a common market structure in which firms have many competitors, but each one sells a slightly different product. Monopolistic competition as a market structure was first identified in the 1930s by American economist Edward Chamberlin, and English economist Joan Robinson.

Definition:

Many small businesses operate under conditions of monopolistic competition, including independently owned and operated high-street stores and restaurants. In the case of restaurants, each one offers something different and possesses an element of uniqueness, but all are essentially competing for the same customers.

Advantages of Monopolistic Competition

1. The Promotion of Competition (lack of Barriers to Entry) 

In such a market, one of its primary aspects is that there a lack of barriers to entry (factors that cause difficulty for a new firm to enter the market e.g. intellectual property rights, advertising, large start-up costs etc.), hence making it relatively easy for firms to enter (and exit) the market. This therefore ensures (at least in the long run) no 'single firm' will find themselves with monopoly power (and with that -- the ability to exploit consumers), due to new entering firms to the market.

2. Differentiation Brings Greater Consumer Choice and Variety 

One of the main positives to come out of a monopolistically competitive market is that in order to be a competitive firm within such a market place, a firm's primary goal is to differentiate itself from others in order to gain greater custom than its rival competitors -- essentially appealing to consumer sovereignty (where consumers determine the goods to be produced within a market). With this, is the provision of greater choice and variety of products and services for consumers to purchase from -- they have a wider range of consumer choice as opposed to just a single choice (either just one product -- monopoly -- or all the products are generic and homogenous -- perfectly competitive).

3. Product and Service Quality - Development

Another potential merit of monopolistic competition, is that of incentives for firms to improve product quality in order to gain (temporary) economic profit -- which in some aspects relates to the above point on some levels. "Monopolistically competitive industries are in a constant state of flux"[4405] -- they are always trying to edging on ways to make profit, whether that be by lowering the cost of production or by improving on their product. The process of 'creative destruction' -- the drive to ensure short term gain.

4. Consumers Become More Knowledgable of Products

A positive externality from monopolistic competition and the intense advertising and marketing that accompanies it, is that due to firms trying to differentiate their products -- consumers become more informed and aware of their options regarding such products and services. They can gain an understanding of the unique features and aspects that certain products have compared to that of others. Hence, with this comes further competition, as firms can recognise what consumers are wanting to a better degree.
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