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Wastes of Monopolistic Competition

Here, We Understand about the Defects or Wastes of monopolistic competition in detailed.

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Wastes of Monopolistic Competition
According to the analysis of price determination under monopolistic competition, we can describe the major wastes of monopolistic competition as follows:
  1. Expenditure on Competitive Advertisement: Expenditure of competitive advertisement is also regarded as a waste of monopolistic competition. It is only under monopolistic competition where the firms produce differentiated products when are close substitutes for each other that the firms have to spend a large amount of money on advertisement, salesmanship, publicity, propaganda etc. to win over the buyers of the rival firms by creating an impression on their mind that the product of the advertising firm is much superior to that of its rival. The bulk of the advertisement is of the 'combative' type which aims at bringing about product differentiation. Such advertisement is clearly wasteful for it leads to unnecessary competition among rivals and high cost to the customers.
  2. Excess Capacity: The firm under monopolistic competition does not produce upto the lowest point of average cost curve, that is, the firm is smaller than the optimum size. The result is that there is no full utilisation of the productive capacity of the firm, there is unused capacity or excess capacity of the firm which can clearly be known as a waste of monopolistic competition. It is a by product of product differentiation. It is a price paid for differing tastes of consumers, forcing firms to produce less.
  3. Unemployment: Productive capacity of the firm lies unutilised under monopolistic competition, that refers, there is the unused or the excess capacity of the firm. Means that labour as a factor of production, along with other factors, remains unutilised. If the productive capacity of the firm is fully utilised it will create more employment opportunities. Monopolistic Competition, therefore is regarded, as one of the cause of unemployment. The existence of unutilised manpower is clearly a social and an economic waste.
  4. Higher Price Less Output: Under monopolistic competition, the price of the product is higher and the output is less as compared to perfect competition. The equilibrium position of a firm under monopolistic competition arrived much before the lowest point of average cost curve, the volume of output here is less than that under perfect competition. Same way, as the average cost is high at the equilibrium point price will be higher than under perfect competition. From consumer view point, the volume of output available is smaller under monopolistic competition than under perfect competition, not only this even smaller output is available at higher price. There is loss of economic welfare of the society under monopolistic competition.
  5. Existence of Inefficient Firms: Under monopolistic competition, the firms produce differentiated products and sell them at different prices. Each firm has a group of buyers attached to it, and is therefore, in a position to charge a slightly higher price than that of its rivals without any fear of a substantial fall in its sales. If the firm raised the price of its product a little, it may lose some of its customers but not all. The higher price charged by the firm may also be the result of its inefficiency. The existence of inefficient firms is undesirable from the view point of the society and considered as economic waste.
  6. Failure in specialisation: This waste of monopolistic competition is insufficient or inadequate specialisation. The competing firms in the 'group' do not tend to specialised in the production of those things for which they are best suited. This is so because the cost advantages out of specialisation cannot be obtained as the sales of a firm cannot be increased beyond a point without reducing the prices. Under monopolistic competition, each firm has to spend money on advertisement or it has to reduce its price to attract the buyers of the rival firms, each firm may find that it pays it betters to produce different types and qualities of products to sell to its own customers rather than face the cost of attracting a large number of customers by producing only one type of product.
  7. Expenditure on Cross Transport: The unnecessary and avoidable expenditure on cross transport is also another waste of monopolistic competition. The waste of cross transport arises because under monopolistic competition markets are not clearly divided among different producers in different regions. 
For example:
A textile mill of Surat may be selling the cloth produced by it to the consumers in Mumbai or Chennai; and at the same time a textile mill of Mumbai or Chennai producing more or less a similar type of cloth [cloth substitute] may be selling it to the consumers in Surat. The price of cloth to the consumer, therefore, necessarily increases because of the transport charges. The wasteful use of transport facilities is the direct result of product differentiation and as such is similar in nature to the problem of excess capacity.
Wastes of Monopolistic Competition
Expenditure on Competitive Advertisement
Excess Capacity
Higher Price Less Output
Existence of Inefficient Firms
Expenditure on Cross Transport
Failure in specialisation
Monopolistic Competition - Wastes of Monopolistic Competition.
Tech writer at NewsandStory