Courses : Intermediate Microeconomics Lecturer : Frischa Adellia Semester : 4th Semester, 2022/2023 Sesion Monopolistic Competition Theory Monopolistic Competition Theory is an economic theory that combines the characteristics of market competition and monopoly. In a monopolistically competitive market, there are many sellers and buyers, but sellers have little control over prices because the product they offer is differentiated. In other words, even though the products offered by various sellers may look similar, there are subtle differences that make them different from the products offered by other competitors. The characteristics of monopolistic competition theory include: 1. Many sellers and buyers in the market 2. The products offered have small differences or differ in quality 3. The seller's success in determining the price depends on the uniqueness of the product 4. Sellers have little control over prices 5. Entering and exiting the market is relatively easy One example of a monopolistically competitive market is the clothing market. There are many different clothing brands with relatively the same quality, but each brand has its own characteristics that make it different from its competitors. This allows sellers to charge a higher price than in a perfectly competitive market. Monopolistic Competition Theory states that markets are composed of many producers who produce products that are similar but dissimilar, but not completely replaceable, and as such, allow producers to influence prices. In monopolistic competition, each producer has some market power because their products have different characteristics from competitors' products, so prices can be affected by product uniqueness. Some of the characteristics of a monopolistic competitive market include: 1. Many producers: there are many firms that produce similar but dissimilar goods or services. 2. Differentiated products: the resulting products have characteristics that distinguish them from other products. 3. Presence of entry barriers: barriers that prevent entry of new competitors into existing markets. 4. Strong advertising: companies often spend heavily on advertising to promote their products. 5. Limited profits: company profits tend to be limited due to competition from other manufacturers and high advertising costs. 6. Existence of market power: firms in monopolistic competition markets can influence the prices of their products through the use of product differentiation. In monopolistic competition, each firm has some market power and can influence prices through the use of product differentiation. This means that producers can earn short-term economic profits, but in the long term, competitors will enter the market and influence prices, so profits will decrease. Monopolistic Competition Theory is a market theory that is different from perfect competition and monopoly markets. In a monopolistically competitive market, there are many sellers and buyers, but the product produced by each seller is perceived to be imperfectly different. Therefore, each seller has some power over pricing his product. The characteristics of monopolistic competition market include: 1. Many sellers and buyers: There are many sellers and buyers in a monopolistically competitive market. This allows for competition among sellers and competitive product prices. 2. Imperfectly different products: Each seller produces products that consumers perceive as imperfectly different. This results in price and demand differences between one product and another. 3. Limited market power: Because the products produced by each seller are perceived to be imperfectly different, each seller has some power over the pricing of his product. 4. Easy entry and exit of the market: Because there are many sellers and the products produced are perceived to be different, entry and exit from the market is very easy. This can result in increasingly fierce competition. 5. Advertising and product promotion: Sellers in a monopolistically competitive market usually use advertising and promotion to differentiate their products from competitors' products. In a monopolistically competitive market, each seller faces a somewhat elastic demand curve, due to the existence of substitutes for similar products in the market. Therefore, sellers usually charge a slightly higher price than the margin cost of their product. This allows sellers to make short-term economic profits, but in the long run, competition will force prices back down to margin cost levels.