Monopolistic competition and economic efficiency.

Essay by dbodrovA+, April 2004

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Year 2000, March.

One of the most important and basic economic issues is the theory of Market Structure. The meaning of economics as a science is the description and explanation of different ways of economic agencies' interactions through commodities, services, mediums of exchange like money, production processes and other in order to increase their wellbeing in a materialistic part of life. The satisfaction, although only partial, of either economic agency could not be achieved while acting without knowing something about the market, on which it operates. One can not predict or expect either producers' or consumers' behaviour without knowing general profit and utility maximising notions and conditions. The structure of a market provides this information.

The theory of Market Structure divides the markets into four most distinctive types. The polar ones are the pure competition and pure monopoly. Between these extreme case lie two imperfectly competitive market structures: monopolistic competition (the one, which is closer to perfect or pure competition, and which would be described in this essay) and oligopoly (closer to monopoly, but has more than one but not many large operating firms, lower monopolistic power and other distinctive features).

The markets, which combine both the price making of a monopoly with a large number of suppliers and free- entry conditions of pure competition are the most popular and wide spread ones. Among these are almost all retail stores like record shops and clothing shops, food facilities like restaurants and fast-food enterprises, producers of non-alcoholic beverages like Coca-Cola or Pepsi and a great variety of others. Because such markets combine the features of monopoly and competition, they are called monopolistically competitive. This model is also very interesting and important tool for analysing such issues as product variety and product choice. It helps us understand whether the market system...