Monopolistic competition

Monopolistic competition in SHAMPOO area.

Monopolistic competition is an industry which has large number of sellers and it is easy to entry and exit. This industry produces differentiated products and they are price-maker.

For instance, shampoos have several kinds of brands in the market. There are shampoos for men, women and even young children like Head & Shoulders, L’Oreal, Sunsilk and many more. 

These firms are competing with each other by using tricks such as different packaging, scent, product attributes and vitamins, to have buyers differentiate between the competitive products. The companies as a whole are the price-maker because an equilibrium market price is non-existent as they might follow their competitors’ price or their cost of production to set the price. For instance, if L’Oreal set their price at RM13.99 per bottle then Sunsilk may opt to follow the trend or increase the price by a little, they may even drop the price a little. 

Apart from that, in this industry, the firms are earning three types of profits when they’re in the short run, supernormal, subnormal and normal profits. Supernormal profit means that the firms are earning more profit, subnormal profit basically means that the firms are having economic loss whereas normal profits means that there is no increase or decrease in the firms’ profits. If Head & Shoulders are having supernormal profit that means the firm are earning more profits in the short run.

The graph above shows that the price set is higher than the cost of the product as the quantity produced remains the same. So, that means Head & Shoulders is earning profits in the short run.

Moreover, in the long run, the firms will only make normal profits due to easy to enter and exit.

The graph above shows that in long run, the firm has no difference between the cost and price so they’re just having normal profits, no gain no loss.