Pricing decisions tend to be the most important decisions made by any firm in any kind of market structure. The concept of pricing has already been discussed in unit . The price is affected by the competitive structure of a market because the firm is an integral part of the market in which it operates.
We have examined the two extreme markets viz. monopoly and perfect competition in the previous unit. In this unit the focus is on monopolistic competition and oligopoly, which lie in between the two extremes and are therefore more applicable to real world situations.
Monopolistic competition normally exists when the market has many sellers selling differentiated products, for example, retail trade, whereas oligopoly is said to be a stable form of a market where a few sellers operate in the market and each firm has a certain amount of share of the market and the firms recognize their dependence on each other. The features of monopolistic and oligopoly arediscussed in detail in this unit.
Edward Chamberlin, who developed the model of monopolistic competition, observed that in a market with large number of sellers, the products of individual firms are not at all homogeneous, for example, soaps used for personal wash. Each brand has a specific characteristic, be it packaging, fragrance, look etc.,though the composition remains the same. This is the reason that each brand is sold Pricing Decisions individually in the market. This shows that each brand is highly differentiated in the minds of the consumers. The effectiveness of the particular brand may be attributed to continuous usage and heavy advertising. As defined by Joe S.Bain ‘Monopolistic competition is found in the industry where there are a large number of sellers, selling differentiated but close substitute products’. Take the example of Liril and Cinthol. Both are soaps for personal care but the brands are different. Under monopolistic competition, the firm has some freedom to fix the price i.e. because of differentiation a firm will not lose all customers when it increases its price. Monopolistic competition is said to be the combination of perfect competition as well as monopoly because it has the features of both perfect competition and monopoly. It is closer in spirit to a perfectly competitive market, but because of product differentiation, firms have some control over price. The characteristic features of monopolistic competition are as follows:
• A large number of sellers: Monopolistic market has a large number of sellers of a product but each seller acts independently and has no influence on others.
• A large number of buyers: Just like the sellers, the market has a large number of buyers of a product and each buyer acts independently.
• Sufficient Knowledge: The buyers have sufficient knowledge about the product to be purchased and have a number of options available to choose from.
• Differentiated Products: The monopolistic market categorically offers differentiated products, though the difference in products is marginal, for example, toothpaste.
• Free Entry and Exit: In monopolistic competition, entry and exit are quite easy and the buyers and sellers are free to enter and exit the market at their own will.Nature of the Demand Curve
• Less than perfectly elastic: In monopolistic competition, no single firm dominates the industry and due to product differentiation, the product of each firm seems to be a close substitute, though not a perfect substitute for the products of the competitors. Due to this, the firm in question has high elasticity of demand.