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.
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