Why a firm under monopolistic competition facing problems?
Here, we discuss why a firm under monopolistic competition facing problems than the firm under perfect competition.
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Why a firm under monopolistic competition facing problems?
First, we understand what is firm?
Meaning of a firm:
A production unit under the control of an entrepreneur who aims at maximisation of profit.
Now, we will discuss the problems faced by a firm under monopolistic competition as follows:
Under monopolistic competition, as in all other market situations, each firm attempts to maximise its profits, a firm under monopolistic competition has to face more complicated problems than a purely competitive firm.
There are three main problems involved in the price and output policy which a firm has to consider under monopolistic competition. The firm can earn maximum profits by any or all of the following ways:
- Changing the Price of the Product or Price Variation: As we know that under monopolistic competition, the firm exercises some control over the price. A firm working under perfect competition has to accept the prevailing market price as given, it cannot influence it or change it. But this is not so under monopolistic competition. Here, if the firm slightly raised the price of its product, it may lose some of its customers, not all. Same way, if it reduces the price it may attract some customers of the rival firms but not all. Thus, if a firm under monopolistic competition raises the price of the product, it will be able to sell less (but the sales will not fall to zero as under perfect competition) and if it lowers the price it will be able to sell more (but the sales will not rise infinitely). The firm therefore, has to choose that price-output combination which gives it maximum profits.
- Improving the Quality of the Product or Product Variation: A firm under monopolistic competition can increase its sales by improving the quality of the product and thereby secure maximum profits. In other words, the amount of the product which a firm will be able to sell in the market depends party upon the manner in which its product differs from others. Product variation refers to an alternation in the quality of the product itself, technical changes, new design, new packing, more prompt, etc. while explaining the equilibrium of a firm under monopolistic competition, we have also to take into consideration about product equilibrium besides price equilibrium.
- Incurring Selling Costs: Under monopolistic competition, a firm a can also increase its sales and profits by incurring selling costs, that is, by incurring expenditure on advertisement, salesmanship, publicity, etc. It can be said that under monopolistic competition, a firm is in equilibrium when profits are maximum and the firm has no incentive to change the price and quality of its product and the amount of selling costs which it is incurring.
CONTINUE READING
Problems faced by a firm under monopolistic competition
what is firm?
Changing the Price of the Product or Price Variation
Improving the Quality of the Product or Product Variation
Incurring Selling Costs
Monopolistic Competition: A firm facing problems under monopolistic competition.
Kinnari
Tech writer at NewsandStory