Monopolistic Competition and Oligopoly: Features, Pricing and Non-Price Competition Questions

Question 1

Define monopolistic competition.

Accepted Answer

Monopolistic competition is a market structure with many sellers where products are differentiated and each firm has some control over price.

Question 2

What is product differentiation?

Accepted Answer

Product differentiation means products are similar but not identical; they differ in brand, quality, design, packaging or services.

Question 3

Define oligopoly.

Accepted Answer

Oligopoly is a market structure where a few large firms dominate the industry and their decisions are interdependent.

Question 4

What is non-price competition?

Accepted Answer

Non-price competition means competing through advertising, product quality, service, warranties and other methods instead of changing price.

Question 5

What is kinked demand curve?

Accepted Answer

Kinked demand curve is an oligopoly demand curve with a kink showing that demand is more elastic for price rise and less elastic for price fall, leading to price rigidity.

Question 6

State any one feature of oligopoly.

Accepted Answer

Interdependence is a feature of oligopoly because one firm’s price/output decisions affect rival firms’ decisions.

Question 7

Explain features of monopolistic competition.

Accepted Answer

Monopolistic competition has **many sellers** but products are **differentiated**, so each firm faces a **downward sloping demand curve**. There is **free entry and exit** in long run, and **selling costs** like advertising are important. Firms have some control over price, but competition remains strong due to many close substitutes.

Question 8

Explain short run and long run equilibrium in monopolistic competition.

Accepted Answer

In the short run, a monopolistic competitive firm reaches equilibrium where **MR = MC** and sets price from the AR curve; it may earn supernormal profit, normal profit or loss. In the long run, supernormal profits attract entry and losses cause exit, shifting demand curves until firms earn **normal profit**. Long run equilibrium occurs where **AR = AC** and **MR = MC**.

Question 9

What is excess capacity? Explain excess capacity in monopolistic competition.

Accepted Answer

Excess capacity means the firm produces less than the output that minimises average cost. In monopolistic competition, long run equilibrium typically occurs at an output **to the left of minimum AC**, because demand curve is downward sloping due to product differentiation. Hence firms operate with excess capacity and do not produce at the most efficient scale.

Question 10

Explain features of oligopoly.

Accepted Answer

Oligopoly is characterised by **few large firms** dominating the market and **interdependence** of decisions—each firm considers rivals’ reactions. There are **barriers to entry** such as economies of scale and brand loyalty. Prices may be **rigid** and firms often use **non-price competition** like advertising, quality improvements and service. Collusion is also possible in some cases.

Question 11

Explain kinked demand curve theory and price rigidity.

Accepted Answer

Kinked demand curve theory states that in oligopoly, if a firm increases price, rivals may not follow, so it loses customers sharply (demand becomes elastic above kink). If it reduces price, rivals may match the cut, so demand increases only slightly (inelastic below kink). This creates a kink and a discontinuity in MR, causing **price rigidity**, meaning price remains stable even when costs change within a range.

Question 12

Write a short note on selling costs and non-price competition.

Accepted Answer

Selling costs are expenses incurred to increase demand for a product, such as advertising, sales promotions, packaging and after-sales service. In monopolistic competition and oligopoly, firms rely on **non-price competition** through branding, product differentiation, quality improvements and customer service to attract buyers and avoid price wars. Selling costs can shift the demand curve for the firm.

Question 13

Explain monopolistic competition. Discuss its features and equilibrium in short run and long run.

Accepted Answer

Monopolistic competition is a market structure where there are many sellers and many buyers, but products are differentiated. Each firm sells a close substitute of others, so it has some control over price, yet competition remains strong.

**Features:** There are a large number of firms, product differentiation through brand, quality and services, and the firm faces a downward sloping demand curve (AR) with MR below AR. Entry and exit are relatively free in the long run. Selling costs and advertising are important and firms compete through both price and non-price methods.

**Short run equilibrium:** A firm maximises profit where MR = MC and charges price according to AR for that output. In the short run, the firm may earn supernormal profit (P>AC), normal profit (P=AC) or incur loss (P<AC) depending on cost and demand.

**Long run equilibrium:** Supernormal profits attract new firms and losses force firms to exit. Entry shifts each firm’s demand curve left until only normal profit remains. Long run equilibrium occurs when AR = AC and MR = MC. Usually the firm produces less than minimum AC output, creating excess capacity.

Thus, monopolistic competition provides product variety but leads to excess capacity and selling costs.

Question 14

Explain oligopoly and its features. Discuss kinked demand curve theory and non-price competition.

Accepted Answer

Oligopoly is a market structure in which a few large firms dominate the industry. Products may be homogeneous (such as cement) or differentiated (such as automobiles). The key characteristic is interdependence: one firm’s decisions affect others.

**Features:** Oligopoly has few sellers, strong barriers to entry, and firms are interdependent in pricing and output decisions. Prices may show rigidity and firms often compete through advertising, quality and service. Collusion and cartels may also exist in some cases.

**Kinked demand curve theory:** The kinked demand curve explains price rigidity in oligopoly. It assumes that if a firm raises price, rivals do not follow, so it loses customers and demand is highly elastic above the kink. If a firm reduces price, rivals match the price cut, so demand is relatively inelastic below the kink. This creates a kink and a discontinuity in the MR curve, so even if MC changes within a range, the equilibrium price may remain unchanged.

**Non-price competition:** Because price wars can reduce profits, oligopoly firms often compete through non-price methods such as branding, advertising, product innovation, better quality, warranties and after-sales service.

Thus, oligopoly is characterised by strategic behaviour and often stable prices with strong non-price competition.

Question 15

Differentiate between monopolistic competition and oligopoly. Also explain excess capacity in monopolistic competition.

Accepted Answer

**Monopolistic competition vs Oligopoly:** Monopolistic competition has many firms, each small relative to market, and interdependence is low. Products are differentiated and entry barriers are low, so long run profit becomes normal. Oligopoly has few dominant firms, high interdependence, and significant barriers to entry. Products may be homogeneous or differentiated, and price behaviour often shows rigidity with strong non-price competition and possible collusion.

**Excess capacity in monopolistic competition:** Excess capacity means producing less than the output at which average cost is minimum. In monopolistic competition, because each firm faces a downward sloping demand curve due to product differentiation, the long run equilibrium output occurs where AR = AC and MR = MC, but this output is typically to the left of minimum AC. Hence firms do not operate at the most efficient scale and have excess capacity. This represents inefficiency, though it also provides product variety and consumer choice.

Therefore, monopolistic competition offers variety but may lead to excess capacity, whereas oligopoly involves strategic interdependence and entry barriers.

Monopolistic Competition and Oligopoly: Features, Pricing and Non-Price Competition

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