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What is Monopolistic Competition
Since this is the industry that has both the factors of monopoly and competition, it is rightly termed as the monopolistic competition.
Monopoly and competition:
There are a number of occasions when you can see that there is one company in the industry that is trying to dominate over all others. Though this is not a monopoly, it is monopolistic in nature. Let us consider that there is a monopolistic seller, who has control of the price to some extent.
In such a case, what he would try to do is to realize that he would lose a few customers if he tries to increase the price. He would also know that he would not lose all his customers.
The sellers like the monopoly for this reason. They can also be called as the price searchers, with a demand curve that is downward sloping in nature.
Though this is the case, they would also know that they are in an industry where they can enter easily and also have an exit very soon.
This way they are not entitled to a profit for the long term. In this case, they would be in no way different from the price takers as in the case of perfect competition.
Since this industry which has both the factors of monopoly and competition, it is rightly termed as the monopolistic competition.
The familiar situation of monopolistic competition
The case of monopolistic competition is a much more familiar case to us. It has the aspects of demand and supply in it. It has these curves in it in order to explain things. Let us take up the graph below to explain in detail.
This is the curve that shows you the seller with the downward sloping demand curve.
It also shows the usual marginal cost curve. It can be observed that due to the demand curve being sloping downwards, the marginal revenue is seen much more below to it.
The sellers, in this case, would try to increase the revenue by the way of selecting that output that would equal the marginal costs and the marginal revenues.
Here it would be at P2. As time goes by, there is one thing that happens. The seller cannot make as much revenue as he was able to in the beginning.
This is due to the restrictions that are there in the free entry into the industry. It would be tough for the newcomers to grab the place of the already settled company.
There is a point of equilibrium seen here. In that case, the average revenue is equal to the average cost. This is the zero profit state.