Hello everyone, in this video we discussed about third type of market which is monopolistic competition. If you see characteristics of monopolistic competition, they are more or less close to pure competition, that means relatively large number of sellers. The big thing that differentiates monopolistic competition is they are able to come up with a product that is not identical, not homogenous, that means product differentiation if you have to give credit to one specific market, which is huge, comes in monopolistic competition.
Now, when there is a product differentiation and if there is large number of firms, anybody who can differentiate the product a little bit and convince the consumers that their product is different can easily enter into the market and exit is also kind of free or easy here. Last one, in this market, they're not competing based on the price. They're competing.
based on the differentiated product. So when you have to convince consumers, advertising is required. So two points that are important, product differentiation and it is non-price competition. Now let's understand how the firms are differentiating the product. There are different methods each firm follows.
One could be developing the trust over the period of time. That means brand name itself works as a differentiated product. Second thing could be type of service. Type of service is like It could be written policy or what all the details that you can understand from the producer or provider of this particular one.
Third thing, location of service. This applies for banking industry or cell phone industry. What all the places the service is available that influences the consumers.
If you consider one firm is better than the other, although the system is about the same, that means they're achieving that possibility of differentiating the product. Next one is product attributes, such as saying that, let's say it's organic or you're using specific ingredients that are more healthy. If you're giving incentive to consumers to purchase your product based on certain product attributes, that is also differentiation.
The next point could be ethics. So what kind of ethics a firm is following in the production? How much they're participating in the community? How are they treating the employees? That also, consumer may view it as different from other firms.
If they consider they are good, they may be willing to pay a little bit higher price for that product. If you keep on going, the list is a lot more. Actually, you can see there are more and more creative ways you can come in terms of differentiating product. Next thing that we want to look at is when you have a product differentiation, they have to constantly manage price, constantly manage the product.
such that no one else can copy and constantly go for advertising to show that how different their product is. So better product differentiation means better advertising required. Next thing that you have to look at is efficiency point of view.
How is monopolistic competition doing overall? Well technically monopolistic competition is not efficient means it creates efficiency loss total surplus is not maximized as in pure competition. Productive efficiency price has to be equal to minimum ATC but as you can see in this market you don't see price equal to minimum ATC that means it creates productive inefficiency.
Same way we can call allocative inefficiency in other words under allocation because price is not equal to marginal cost price definitely is going to be more than marginal cost even though this is not achieving efficiency. A lot of economists consider that from the consumer point of view, pure competition, over pure competition, monopolistic competition is preferred market. Why is it preferred market? Even for the consumer's point of view, although we are not achieving efficiency, one, it actually leads to increased product quality.
That means everybody is trying to differentiate their product. Everybody is trying to show the consumer their product is good. That means they're working hard to improve.
improve the product quality that can be enjoyed by the consumer over the period of time. Second thing that you see is more variety comes into the market. It's no longer homogenous product. People can choose a product that is actually fits their consumption needs. You don't have to stick to one product for everybody.
Not like one telephone service that is available for everyone. We have different plans that is creating product variety here. That you don't see in pure competition.
So that means although monopolistic competition is inefficient, it actually compensates that inefficiency. by coming up with advantages here, that is increased product quality and more product variety.