Markets considered under a monopolistic competition structure are common in market and mixed market economies. The smartphone market is a prime example because it adheres to key characteristics such as the presence of numerous firms offering similar albeit differentiated products for a large target market.
Of course, despite its name, it is important to note that this market structure is different from a monopoly. It has notable advantages that make it an efficient structure for mainstream goods markets. However, it also has notable drawbacks and disadvantages when compared to perfect competition and other market structures such as oligopoly and monopoly.
Pros: Advantages of Monopolistic Competition
Competition is a key advantage of monopolistic competition. This market structure is ideal in market economies and its variations such as mixed market economies because it both promotes and demonstrates the benefits of having numerous firms in a single market competing for customers. Of course, there are more specific advantages.
Below are the specific advantages of this market structure:
• Promotes Innovation: The presence of numerous competitors in a single market or industry means that the intensity of competitive rivalries is high. Competition fosters innovation because firms are focused on winning customers or a segment of the target market through differentiation. One of the ways to differentiate a product is through technological advancements or disruptive value propositions.
• Expansive Product Options: Remember that differentiation is fundamental to this market structure. Firms compete by differentiating themselves and their products while appealing to the preferences of the entire target market or its segments. This benefits the consumers because they have more options to choose from. Some products are more inexpensive to appeal to budget-conscious consumers while others have better features and premium pricing to appeal to high-end consumers.
• Low Entry Barriers: Another advantage of monopolistic competition is that there are few or low barriers to entry. Startup firms or established ones planning to venture into a particular market can readily enter and compete given that they have enough resources. The ease of market entry promotes competition and innovation, thereby benefitting an entire market or industry and its consumers.
• Market Information Availability: This structure also makes market information more available to the public. Firms spend on marketing promotion to create product and brand awareness, as well as attract and retain the attention of their target customers. These firms also have a considerable level of transparency to allow the media and analysts disseminate business and product information to the public. Hence, markets under this structure have lower search costs and have more informed consumers.
• Pricing Variations: It is also important to highlight and reiterate the variations of prices in markets under this structure. Firms in these markets are price setters. However, because the competition is intense, no single firm can dictate the price of a particular product or product category. Some might set higher prices to appeal to premium customers but there would be other firms that would offer mid-tier to low-tier pricing schemes.
• Active Business Environment: From the perspective of investors, investing in markets or industries populated by a sizeable number of firms or producers and customers or consumers can be fruitful. The level of competition creates a vibrant business landscape. Furthermore, there are several firms to choose from. The availability of market information also promotes informed investment decisions. An active business environment benefits both stock market and bonds market investors.
Cons: Disadvantages of Monopolistic Competition
The aforesaid advantages of market competition are demonstrated in markets that produce and sell fast-moving and contemporary products for mainstream consumption. Examples include the processed food and beverage and the consumer electronics markets. However, despite these benefits, this market structure has notable limitations and major issues.
Below are the specific disadvantages of this market structure:
• Susceptibility to Inefficiencies: Some firms operating in markets or industries under this market structure are prone to production and overall operational inefficiencies because of their inability to achieve and take advantage of economies of scale. The intensity of competitive rivalries means that there are some limitations in accessing available but finite resources and reaching a large but saturated target market.
• Bargaining Issues: Both the bargaining power of customers and the bargaining power of suppliers can be an issue for some firms, especially smaller ones or new entrants. Customers have more options to choose from. Startups and smaller firms cannot set higher prices for their untested and unproven products. In addition, suppliers have also more options. Some might set a minimum order requirement while others have the power to decide which firm they want to be in business with.
• Excessive and Wasteful Production: Another disadvantage of monopolistic competition is that some firms operating in this structure are susceptible to producing in excess that is wasteful or unnecessary. Some markets such as the smartphone market have short produce lifecycles. Others such as the fast-moving consumer goods market produce secondary products that can be wasteful such as excess packaging.
• Questionable Standards: In addition, some firms tend to develop and implement questionable strategies and practices. These include predatory pricing as part of an attempt to drive out competitors. Others include investing heavily in advertising or deploying misleading advertising to ramp up their sales rather than focusing on product quality. The markets and industries can also lack quality standards because of the large number of producers producing similar but differentiated products.