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Home Price and Output Determination Under Monopolistic Competition Wastes of Monopolistic Competition

 

Wastes of Monopolistic/Imperfect Competition:

 

Under monopolistic competition or imperfect competition, there are wastes of expenditures. Wastes of monopolistic competition are in brief as follows:

 

(i) Huge expenditure on advertisement: The entrepreneurs in order to overcome the irrational preferences of the consumers like prejudices, liking of commodities, or shop or person have to spend large sums of money on advertisements. This is purely a waste from community point of view.

 

(ii) Expenditure on cross transportation: Another waste of monopolistic competition is the expenditure incurred on the cross transportation of the commodity. For instance, if a commodity produced in New York is very similar to the commodity produced in Washington, the buyers in Washington due to their irrational preferences may demand the commodity produced in New York and vice versa. Had the buyers given preference to the commodity produced in their own locality, this would have saved the expenditure on cross transportation of the goods.

 

(iii) Production of variety of products: Under monopolistic competition, an industry may not specialize in the production of those commodities for which it is best fitted. This is because of fact that it has to spend large sum of money on advertisement and secondly it has to cut down the prices in order to attract the customers. So it may find advantageous "to produce varied assortment of types and qualities to sell to its own particular customers rather than face the cost of attracting a large number of customers for one type of product alone".

 

(iv) Existence of inefficient firms: Under monopolistic competition, the inefficient firms also continue producing the commodities along with the efficient firms due to irrational preferences of the customers. The customers, therefore, have to pay higher prices for the goods produced by the inefficient firm. The consumers, thus, suffer monetary loss and the nation wastage of resources.

(v) Prevents standardization of products: Another wastage of imperfect competition is that it prevents !he standardization of the commodities. When goods are standardized, they can be produced on a large scale. In case of monopolistic competition or imperfect competition, no producer would like to produce any design of the commodity on a large scale because it involves risk. The liking of the design may change and his goods remain-unsold.

 

(vi) A firm need not be of the optimum size: Under perfect competition, all the firms in the long run are of optimum size and they are producing at the lowest average cost. If a firm is not of most efficient size, it will have to expand its output so that it should produce at minimum average cost. Under monopolistic competition, a firm need not be of the optimum size. There is no doubt that if it expands its output, the average cost will fall but then it will have to lower the price as well. The reduction in price may result in decrease of total revenue. So the firm may not expand its scale of business. From this, we conclude, that the total number of firms in an industry, under monopolistic competition, will be greater than under perfect competition. This is due to the fact that in perfect competition all the firms are, of the most efficient size and inefficient firms are eliminated. While in monopolistic competition, inefficient firms along with efficient firms continue to exist. The society, thus, pays higher prices for the products.

 

Relevant Articles:

 

Historical Background of Monopolistic Competition
What is Monopolistic/Imperfect Competition
Characteristics of Monopolistic/Imperfect Competition
Short Run Equilibrium Under Monopolistic/Imperfect Competition
Equilibrium Price and Output in the Long Run Under Monopolistic/Imperfect Competition
Wastes of Monopolistic/Imperfect Competition

Price and Output Determination Under Oligopoly

Pricing and Output Determination Under Duopoly
Three Important Models of Oligopoly
 

Principles and Theories of Micro Economics
Definition and Explanation of Economics
Theory of Consumer Behavior
Indifference Curve Analysis of Consumer's Equilibrium
Theory of Demand
Theory of Supply
Elasticity of Demand
Elasticity of Supply
Equilibrium of Demand and Supply
Economic Resources
Scale of Production
Laws of Returns
Production Function
Cost Analysis
Various Revenue Concepts
Price and output Determination Under Perfect Competition
Price and Output Determination Under Monopoly
Price and Output Determination Under Monopolistic/Imperfect Competition
Theory of Factor Pricing OR Theory of Distribution
Rent
Wages
Interest
Profits
Principles and Theories of Macro Economics
National Income and Its Measurement
Principles of Public Finance
Public Revenue and Taxation
National Debt and Income Determination
Fiscal Policy
Determinants of the Level of National Income and Employment
Determination of National Income
Theories of Employment
Theory of International Trade
Balance of Payments
Commercial Policy
Development and Planning Economics
Introduction to Development Economics
Features of Developing Countries
Economic Development and Economic Growth
Theories of Under Development
Theories of Economic Growth
Agriculture and Economic Development
Monetary Economics and Public Finance

History of Money
 

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