Competition in the marketplace is as natural of a consequence as squinting our eyes when struck by light. Moreover, competition is essential for the growth of businesses, and it also enhances the quality of products and services for the consumers. However, sometimes a specific market faces saturation. With so many firms in the market, understanding who is leading the segment becomes difficult. This, along with other factors, gives rise to monopolistic competition.
What is a Monopolistic Competition?
In monopolistic competition, many producers compete with each other in a specific segment, and since it is a type of imperfect competition, product differentiation exists but each producer offers a slightly different product, therefore, the perfect substitute for a product does not exist in monopolistic competition. In addition to product differentiation and many firms, there are some factors that determine if a market is experiencing monopolistic competition. Freedom of entry and exit is another aspect of monopolistic competition, new companies can enter the market whenever they please, and seeing other firms sustaining a loss, they can exit as well. Another characteristic of monopolistic competition is independent decision-making, i.e., terms of product exchange are set by each firm without considering its effects on competitors. Moreover, monopolistic competition firms do possess some degree of market power. Although it is not as same as a true monopoly, these firms can change their prices and still would not lose customers. Lastly, buyers, as well as sellers, have limited information in this structure.
Examples of Monopolistic Competition
1. Fast Food Industry
The entire fast food industry can be considered a monopolistic competition because of how similar each company’s products are, yet differ ever so slightly and can not be substituted for others. Taking the example of the largest companies in this market; Burger King and McDonald’s, both offer burgers and other products. Each company has trademarked its flagship burger, whopper and big mac, respectively. Although both brands use nearly the same ingredients to create a burger, they cannot be substituted for one another, and there is no agreement between these two brands. Customers are used to their distinct tastes, and will not opt for one over the other, yet they require both to exist, making it a monopolistic competition.
Similar to the fast-food industry, restaurants are also a part of monopolistic competition. Two factors that contribute to restaurants being monopolistic competition are the ability to set prices irrespective of competitors and the freedom to enter or exit the market. Granted, each restaurant in a city may offer different products based on cuisines; however, the experience to enter a premise to ingest food remains the same throughout. Even similar restaurants say Greek restaurants may offer products at significantly different price points. Additionally, depending on the location, one restaurant may have more power over the others based on the number of customers.
3. Hotel Industry
The hotel industry is one of the oldest markets in the world. Paid accommodation services for travelers have been around for centuries, and unsurprisingly, it is flourishing to this day. It is a great example of monopolistic competition because different hotels provide similar services; however, with slight variations. Depending on these variations, hotels can drastically charge a higher price to their customers. Moreover, location is also a defining factor when it comes to setting the price of rooms in a hotel.
Although the premises and the location of a hairdresser play an important role in determining its place in the market, it is undoubtedly the skill of the hairdresser that sets a specific saloon apart from others. Moreover, hairdressers provide a unique and customizable service, as each person requires a different approach to their hair. Apart from the skillset, a unique service that cannot be had at other stores determines the price of the service. For instance, a hairdresser offering hair treatment with the latest machine in the segment can set the price irrespective of the competitors. Lastly, the factor of retention is immense in this segment. Customers prefer going to one specific hairdresser over the other.
5. Clothing Stores
This includes online clothing stores as well. Each store offers an endless selection of clothes; however, each store is offering the same product with different branding and ever so slight variations in their products. Similar to hairdressers, brand loyalty among customers plays a huge role when it comes to final purchasing decisions. This gives different brands the ability to charge any price for their products making it a monopolistic competition.
6. Grocery Stores
Grocery stores are nothing but monopolistic competition because each product offered in stores is identical; however, at a slightly different price. Large grocery store chains offer their own branded products that are more or less the same. Additionally, marketing strategies and different sales are what attract customers from one store to another.