10.1 - Monopolistic Competition - YouTube

In this video, we're going to  examine the characteristics of  

the market model of monopolistic competition.  

In earlier videos, we talked about the extreme  cases of perfect competition and monopoly. In  

practice, there are very few examples of  perfectly competitive or monopoly markets,  

pretty much all real-world markets fall within  the definitions of monopolistic competition  

or oligopoly. The basic assumptions of the market  model of monopolistic competition are that,  

in a manner similar to perfect competition, there  are many sellers. The difference, though, is that  

the products they produce are close substitutes,  but not perfect substitutes, for each other,  

as it was in the case of perfect competition.  Each firm is producing its own unique product.  

There are no barriers to enter or exit, as in the  case of perfect competition, and in a way that  

differs from monopoly. But, because of product  differentiation and variation in consumer tastes,  

when a monopolistically competitive firm raises  its price, it will lose some of its customers but  

not all of them and, as a result, each firm faces  a downward-sloping demand curve. Each firm is  

like a little monopoly, but it's a monopoly that  actively competes with other monopolies producing  

similar products. We can see this best,  perhaps, by talking about some examples of  

monopolistic competition. Restaurants and bars,  particularly in larger cities or communities,  

would be a good example of monopolistic  competition. Each restaurant offers its own  

unique menus, they use their unique recipes, they  are decorated in different ways, and they all have  

their own unique ambiance. Similarly, for bars.  Different bars will have different types of music  

(or no music), they may have live music, they may  have dancing, they may cater to older individuals,  

they may cater to younger individuals. But, each  restaurant and bar tries to differentiate itself  

from other restaurants or bars in a given region  so that it can attract some sort of customer  

loyalty, which is important in getting that  downward-sloping demand curve to give them some  

control over their prices. Many types of clothing  also fit in this category. If we look at t-shirts  

or footwear (broadly defined) or hats or jackets.  there are many, many producers of these products,  

each of which, though, is producing a product  which is differentiated from other products  

produced by other companies (or other products  produced by the same company). Hairdressers and  

many other personal service providers also are  providing a somewhat differentiated service.  

Each hairdresser has their own unique style, they  offer a different mix of services, and so forth.  

Auto repair shops also are producing a similar  but differentiated product, in that certain repair  

shops specialize in certain types of repairs:  some of them focus on providing a limited array  

of repairs at relatively low prices, others  specialize in very specific types of repairs.  

They may also differ in terms of the quality of  the repairs, their quality of their diagnostic  

service, and perhaps also in terms of how much  upselling they attempt to do. TV programming has  

become increasingly a monopolistically competitive  industry now that cable services are providing  

often hundreds of channels, and we also have many  streaming services over the internet where, at  

any given time, people have the option of watching  thousands or tens of thousands of different types  

of programming streaming through various apps or  by streaming over the internet. And each program,  

obviously, is a somewhat different product. And  the same is also true in the market for books and  

music and similar types of media. So, in general,  in a monopolistically competitive industry we  

have firms that are trying to differentiate their  products so that they have a bit more control over  

their price and their profits. In the next video,  we'll talk about how output prices and profits  

are determined in both the short run and the  long run in monopolistically competitive markets.