A large number of companies, product differentiation, competition on price, quality and product marketing, and businesses are free to come and go: Monopolistic competition is characterized by four factors.
A large number of companies
The large number of companies means
- A small market share of each company.
- The domination of one company, so that no one fixed the shares directly to the actions of other companies.
- Agreement is impossible because there are so many companies.
Product differentiation makes a product that is slightly different from that of companies competing products. As a result, there are not perfect substitutes and if the monopolistic competitive firm faces a downward-sloping demand curve.
Competition on quality, price and marketing
A monopolistically competitive firm will compete on:
A company promotes the idea that their product has better quality than their competitors' products. These attributes include the design, reliability, service for the buyer and the buyer easy access to the product.
A monopolistically competitive firm, the company is fixed at both its price and its performance against a downward-sloping demand curve.
A company uses advertising and packaging of its products known for uniqueness.
In and out
If firms in monopolistic competition earn an economic profit in the short term, new firms enter the market. This increase in supply and demand takes each company lowers the price until gaining a normal profit. If companies are short-term economic losses, some firms exit the industry. The price rises to a normal profit is earned by other companies.
Identifying Monopolistic Competition.
The ratio of four-firm concentration
Dynamic models of oligopoly: Harwood Fundamentals of Applied Economics
The concentration ratio of four companies is the percentage of the value of the share of sales of the four largest firms in a sector. A ratio of four-firm concentration exceeds 60 percent, is considered indicative of a market that is highly concentrated and dominated by a few companies of an oligopoly. Less than 40 percent ratio is considered an indication of monopolistic competition in the competitive market.
The Herfindahl-Hirschman Index (HHI) is the square of the percentage (or the sum of all firms, if under age 50) are a combined market share of each company in the 50 largest firms in the market . If the HHI is greater than 1,800, the market is considered competitive. This is as a guide by the Ministry of Justice to make decisions on whether to challenge a merger used.
Limitations of concentration ratios
a. The geographic scope of the market
Concentration ratios have a national perspective on the market, but some products are in regional markets (in this case, the degree of competition may be overestimated) and others in global markets (in this case, the degree of competition could be underestimated) sold.
b. Barriers to entry and firm turnover
Concentration ratios do not take into account the presence or absence of barriers to entry.