Disadvantages of Monopolistic Competition

Disadvantages of Monopolistic Competition

1. They Can be Wasteful -- Liable of Excess Capacity-Monopolistic Competition

A negative factor of firms that are in monopolistic competition is that they don't produce enough output to efficiently lower the average cost and benefit from economies of scale. As if they were to do this (as from the graph)[4405] they are reducing their 'economic profits', as a result of the marginal revenue being less than that of the marginal cost. Moreover, the funding and expense that goes into packaging, marketing and advertising can deemed extremely wasteful on some levels.

2. Allocatively Inefficient -Monopolistic Competition

Compared with perfect competition, it can be shown that such firms (particularly from the video above) that there is an element of allocation efficiency as the price is above that of the marginal cost curve -- less so in the long run, due to more competition.

As the demand curve is one which is downward sloping this then implies the price has to be greater than the marginal cost for a monopolistically competitive firm. Hence it is allocatively inefficient as not enough of the product gets produced for society to benefit -- they want more, however this would force the company to lose money.

3. Higher Prices -Monopolistic Competition

Another drawback of a monopolistic competition, is that as a result of firms having 'some market power', they can extenuate a mark-up on the marginal cost of revenue. Compared to a perfectly competitive firm, who have their price equal to their marginal cost.

Causing a deadweight loss in society as described above. This would be difficult for a governmental authority to regulate for two reasons: i) there are many firms and ii) they would be making a loss -- hence eventually forcing such firms out of business.

4. Advertising-Monopolistic Competition

Although, as stated earlier, advertising and marketing can be beneficial to consumers on some levels such as providing information to customers and from this an increase in competition, it can also have negative impacts on consumer sovereignty. It is argued to manipulate and distort what consumers desire, as well as obviously reducing competition as consumers become captivated over the perception of differentiation.
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