Price and Output Equilibrium under Monopolistic Competition
According to Chamberlain while analyzing and evaluating the price and out put behavior of the monopolistic competitor the following facts are to be taken into consideration.’
(1) Each monopolistic firm produces and sell s good which is somewhat different from the goods of- other firms in the industry. The difference in product is created by making variations in style, design, feature, material and through marketing and advertising. The difference in the goods produced may be real or imaginary.
(2) The monopolistic competitor sells a very small part of the total market. Therefore, he has limited control over the price of the goods prevailing in the market. The firm is neither a price taker as in perfect competition nor a price maker as in monopoly. The monopolistic competitor is a price searcher.
(3) In case the monopolistic firm sets the price of his product higher than of its rivals, he will lose some of his -customers and a decrease in sale. If the price of product is fixed lower than of his competitors, he will be able to attract some customers and increase his sale. The monopolistic competitor will choose that price-output combination which maximizes his profits.
(4) Each monopolistic firm faces a particular demand curve of its own. Some firms may have less elastic demand and some more elastic demand. The degree. of elasticity at points along the demand curve depend upon the exact number of rival firms and the degree of product differentiation.
The equilibrium price and output of each firm in the industry is different from that of others due to the difference in demand curve slopes.
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