Advantages and Disadvantages of Monopolistic Competition

In perfect competition buyer is the king as the seller do not have any pricing power while in case of monopoly seller is the king as he has complete control over the price of a product. While both the situation are extremes and that is the reason why both the situations seldom exists, in practical life in between situation exists which is called monopolistic competition where there many sellers who sell slightly differentiated products which gives sellers slight control over price. Let’s look at some of the advantages and disadvantages of monopolistic competition –

Advantages of monopolistic competition

  1. In case of monopolistic competition buyers get plenty of options due to differentiated products as every product has some additional feature which is not the case with perfect competition where sellers sell homogeneous products or in monopoly where sellers do not bother to add new features to product as there is no competition.
  2. Another advantage of monopolistic competition is that since different companies are selling differentiated products they tend to advertise about it through various channels of communication which make customers more aware about the various products and their features which in turn helps the customers in making informed decision by comparing the features of various products.
  3. It helps in innovation because the only thing which will help the company in surviving in case of monopolistic competition is to constantly add new features to product and hence in a way one can say that monopolistic competition forces the companies to invest in research and development so that the company can produce better quality product at cheaper rates than their competitor.

Disadvantages of monopolistic competition

  1. The biggest disadvantage of monopolistic competition is that due to differentiated products chances are companies may charge more than fair price from the consumers for extra features in product because unlike perfect competition where there is no scope for companies to charge higher price as companies sell homogeneous products.
  2. Another disadvantage of monopolistic competition is that companies in order to differentiate their products from other companies add irrelevant features and do not concentrate on improving the basic product which in turn results in consumers paying extra for added features but in reality that feature of product does not result in increase in consumer surplus.
  3. In monopolistic competition companies spend too much money on advertising as it is the most important part as far as monopolistic competition is concerned which in turn results in increase in expenses for the company and company in turn passes this increased cost to consumer in the form of higher price for the product.

As one can see from the above that monopolistic competition has many advantages as well as disadvantages, however in real or practical life monopolistic market structure is present in the majority of markets all over the world.

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