Market Competition Perfect and Monopolistic Competition

The business community continually changes & possession of businesses alter hands as smaller entities are swallowed up by bigger corporations. They listen to about it on a regular basis in the news, but yet only a few people can name a example of monopolistic competition, or realise what the definition monopolistic competition is. This article gives a brief insight in to the definition monopolistic competition & monopolistic competitive firm.

The definition monopolistic competition is firms which in effect hold a monopoly over their products, in that the firm can influence the market cost of its product by altering the rate of production. Monopolistic competitive firms produce products that are not ideal substitutes or are at least perceived to be different to all other brands products.

Unlike in ideal competition, the monopolistic competitive firm does not produce at the lowest feasible average total cost. In lieu, the firm produces at an inefficient output level, reaping more in additional revenue than it incurs in additional cost versus the efficient output level.

It could be said, to name a example of monopolistic competition, firms who control oil production or gas production are monopolistic. They produce identical products except for branding, but due to a comparatively low number of firms who control the giant amount of the product, can control the cost to an extent by decreasing supply slightly.

An example of an ideal competition is some agricultural markets, where supply is to meet demand. However, this example is not strictly the case in places such as Europe, where subsidies are provided encouraging farmers to produce as much as feasible irrespective of demand.

The opposite of monopolistic competition is ideal competition. Ideal competition is an economic model that describes a hypothetical market form in which no producer or consumer has the market power to influence prices. While monopolistic competition is inefficient, ideal competition is the most efficient, with supply meeting demand & production therefore matching this, so stock is not sat in storage for extended periods or going to waste.

Perhaps the best examples of ideal competition companies would be giant auctions of identical goods with all potential buyers & sellers present. By definition, a stock exchange resembles this. The flaw in thinking about the stock exchange as an example of Ideal Competition is the fact that giant institutional investors (e.g. investment banks) may solely influence the market cost. This, of coursework, violates the condition that "no seller can influence market price".