A Monopolistically Competitive Market Marketing Essay

A monopolistically competitive market is a market structure that exhibits both characteristics of pure competitive and monopoly. The firms produce a slightly different product that may be close substitutes but are not perfect substitutes and all firms are essentially competing for the same customers. Therefore the firms don’t compete on price as much as trying to differentiate their product to reflect the value added features that distinguish their product in the marketplace. Also the firms in monopolistic competition are ” Price Makers” because each firm make unique product, they can set its own price and does not have to ‘take’ it from the industry as a whole. The price and the production outputs that individual firms produce are based on the individual’s decision and its” Cost Production”. However, the firms may use the industry price as a guideline to select the production methods and materials.

Key characteristics of a monopolistic competitive market are:

A relatively large number of sellers: (Nokia, Samsung, LG, Motorola, HTC, Apple, Sony, Blackberry, Acer, etc…Cell Phone Manufacturers)

Small market share: Each firm has a comparitively small percentage of the total market. As shown in the graph below, the majority of the market is owned by companies running the Android operating software.

Mobile Platform Market Share

Mobile Platform Market Share    

No Collusion: A relatively large number of firms will not combine to restrict outputs and set prices.

There is no effort to set price by collaboration. Each company sets own prices due to their outputs and costs.

Independent Action: Each firm is independent and can determine its pricing policy without considering its rivals. eg. A firm could moderately increase its sales by cutting its prices, but that would have no significant effect on its competitors sales.

When the new model of iPhone comes out, the older model will almost always be reduced in price. However, this is not because of any competitor.                                

Differentiated products: Each cell phone manufacturer has their unique attributes to set their phone apart from competitors.

Product Attributes: product differentiation may entail physical or qualitative differences in the products themselves. Real differences in functional features, materials, design, and workmanship are the vital aspects of product differentiation.

Each cell phone company strives to put its own touch on their product. Apple has their own independent operating system (IOS) and Samsung uses the Droid operating system. Apple’s operating system is only available for iPhones, however the droid operating system is used by a variety of companies (HTC, Motorola, Samsung & Sony).

Service: Service and the conditions surrounding the sale of a product are forms of non-price product differentiation too. 

The service of Apple products also differentiates from others. The service is in a company specific store by their representatives called “Geniuses”

Location: Accessibility of stores that sell certain products or placement of products in stores.

Brand Names and Packaging: Brand loyalty and packaging can affect demand.

Apple’s iPhone. It’s pretty much the same as any other phone. It has touch screen capability, can surf the web, can listen to music, but the apple brand as well as advertising makes it a big hit on the market of cell phones.

Some Control over Price: Producers can charge extra for extra features, etc.

Generally, firms are “price makers” since each firm owns such a small percentage of the total market; if a firm changed the pirce of their product, there would not be much of an effect on the market.

The firms in monopolistic competition will DIFFERENTIATE their products and make them more appealing to the customers in order to maximize their profits.

Easy entry and exit from the industry:

In the SHORT RUN, a firm may obtain economic profits or losses.

However, since there are little barriers from preventing companies to enter or leave the industry, in the long run, the firms will only obtain normal profits

Remember: entry eliminates profits; exit eliminates losses!

 Advertising:

A unique feature of a monopolistic competitive market is that there are product differentiations.

Goal of product differentiation and advertising (non price competition) is to make price less of a factor in consumer purchases and make product differences a greater factor.

A successful advertisement would shift the firm’s demand curve to the right and make demand more inelastic.

Since monopolistic competition of the cell phone market is based on creating differentiated products in the mind of consumers. The monopolistic competition must engage in the advertising. Because of the used of advertising helps establish and maintain product differentiation in the market. The successful advertising essentially brings the product uniqueness to the consumer’s intention and drives the firms’ revenues.

The cell phones market is a good example of the monopolistic completive market because each firm is trying to differentiate their products by making their phones unique or special. The examples are iPhone5 and Samsung Galaxy III. Both products use the “Physical product differentiation”, where firms use size, design, color, shape, performance, and features to make their products different. And then the firms use the “marketing differentiation” such as promotional technique or/and packaging to attract the consumers. Meanwhile, the firms can limit the supply (production and number of products distributed in specific areas) and therefore can set the price high which normally at the Max Price: P = P x Q when the first launch in the market. The example is when the Samsung Galaxy was released it cost about $200.00 more than you can buy it at a store today. This is mainly because when it first entered into the market, the profit maximization is MC=MR. The consumers were willing to pay for high price caused the AR to be above ATC and MR. And in the long run Samsung lost their competitive advantage due to it is easy for competitors to develop substitutes. At this time, the P=AR=minimum ATC.

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As you can see that the production of cell phones is highly technologically dependent however there are no entry or exit barriers in the market. The consumer demand is allowing manufactures to generate additional profits in the short run while their competitors develop matching products. And eventually the profit and demand is derived in the long run according from new products with better technology has entered the market (P=AR=min ATC).

The cell phone companies tend to have the production inefficiency because they can never fully exploit their fixed factors prior developing the new product. That is because they must keep the innovation in order to keep their advantage and their super normal profits simultaneously with their uniqueness.