 So, then after discussing the perfect competitive market and monopoly market, we will move into a new kind of market which is in between the perfect competitive and monopoly market structure. And this is the form of imperfect competitive, imperfect competition or this is a part of a imperfect market structure. So, imperfect competition refers to those market structure that fall between the perfect competition and pure monopoly. So, it is a market structure that is strictly between the perfect competition and the pure monopoly market that have some feature of competition and some feature of monopoly. It has taken some feature of a perfect competition and some feature of the monopoly. And this concept of monopolistic competition generally comes from the seminal work of professor Chambal in theory of monopolistic competition. And the basic assumption of the monopolistic competition is same as perfect competition except the homogeneity of product. So, if you look at it more close to the perfect competitive market structure, because the basic assumption of the monopolistic competition is same as the perfect competition except typically the homogeneous product, homogeneous nature of the product. So, let us discuss the features of the monopolistic competition and then we will see whether how it is different from a perfect competitive market structure or a monopoly market structure. So, there are large number of firms each satisfying a small but not microscopic share of the market and share of market demand for a similar not identical because there is not a homogeneous product. The share of the market demand is for a similar product not for the identical product. There are large number of firm each satisfying a small but not a microscopic share means large number of where they share a small but it is not very insignificant also. Products are close substitute but they are not perfectly substitute each product is different from the other in term of some of the component. Seller of each product group can be considered competing firm within the industry. So, seller of each product group that is substitute product can be considered as the considered competing firm within the industry. Market is monopolistic product differentiation created degree of the market power it is why we call it is a monopolistic market because each product is different from the other product. So, when you are when you are doing that independently each product is a single product with no close substitute and that product differentiation created degree of the market power. Market is competitive there are because there are large number of firms and there is easy entry into the market. One of the important feature of the monopolistic competition is the product differentiation and how this is how this product differentiation makes it is different. Each firm produce a product that is at least slightly different from those of other firms rather than being price taker each firm faces a downwards looping demand curve. So, each firm produce a product that is at least slightly different from those of other firms and we will discuss about the parameter on what basis the product has to be different from the others and they are not the price taker each firm follow a downwards looping demand curve. So, whenever they have to increase the output they have to reduce the price. The firm in the market do not consider the reaction of the rivals when choosing their product price or annual sales target. It means the price and output decision of the firm is not getting influenced by the reaction of the rivals. There is a relative freedom of entry and exit there is no barrier as such apart from product differentiation creating as a barrier. Neither a opportunity nor the incentive exist for the firms in the market to cooperate in any way that decrease the competition and the number of firms in the market adjust until the economic profit are 0. Now, since we are talking about a feature product differentiation and that makes the market different from the other market structure. Now, we will see how the product differentiation is being practiced. The product has to be different from each other either on the basis of the product quality or in the basis of the services or in the basis of the location or in the basis of advertising and packaging. So, when it comes to product quality may be you can take a case of a toothpaste or you can take a case of a soap. You get a soap which ranges from may be 500 rupees to 5 rupees. How they are different from each other? They are different from each other in term of the quality or you can take the case of detergent powder it ranges from 200 to 2 rupees and how they are different from each other? They are different from each other in term of the quality the raw material that is used and also the usefulness of the product. Similarly, services like if you take the case of a typically this is the after sale service if you take the case of a grocery store or you take a case of a supermarket. Now, what is the service? Some supermarket they do a home delivery, some supermarket they will the their assistant will help you to put your grocery in your vehicle, some super store they may be they will take your typical coupon or all these things. So, these are what these are the services extended to the consumer and the product is different from each other in term of the service associated with the store service associated with the product. Like you take the after sale service of a vehicle after sale service of a electronics product. For someone it is free for someone some for a typically if you are sending your vehicle for a servicing in some store they come and pick you pick your vehicle. In some store at least they will pick your vehicle but you need to pay a charge for someone they will just give a reminder. So, these are all small small activities small small service given by the given by the store or given by the specific product and that makes the product different from one to another. Location the location decides how they are different from each other may be the same brand shop when it is in a mall or when it is from the outskirt area that makes the difference and that creates the product differentiation. Like if you take a grocery store near to the petrol pub in the highway and the grocery store near in the nearest locality that makes the difference between the products. Advertising and packaging again may be if you look at for someone the focus is more on the packaging. So, packaging has to be neat packaging has to be attractive. So, that makes the difference if the packaging is good you are buying the product and advertising who is doing a massive scale of advertising and who is not doing it. So, generally if you look at the brand loyalty also comes from the fact is that who is advertising for the product and that somehow influence the product has to be different from the other product. Because if it is a well known celebrity you always feel that whatever the endorse that is has to be a good product because the celebrity is endorsing the product rather than endorsing the same product by someone else there the comes the product differentiation because that takes out the consumers perception about the product. If it is a celebrity it has to be good rather than the other one who is advertising for the product. Then we will talk about the price and output determination in case of a monopolistic competition. This is similar to the monopoly as it face a downward sloping demand curve which is because of a strong preference of section of consumer for the product and quasi monopoly of the seller over the supply. So, pricing and output decision is similar to monopoly it face a downward sloping demand function because it is a strong preference of the section for consumer for the product or typically the brand loyalty and there is also a quasi monopoly of the seller over the supply. Brand loyalty or strong preference of the consumer gives the seller the opportunity to raise the price and yet retain some consumer. So, brand loyalty or the strong preference of the consumer generally allow the seller to increase the price but steal the consumer they buy it because there is a brand loyalty or the strong preference for it. Since, each product is substitute for the other the firm can attract the consumer of other product by lowering the price also and that is why we get a downward sloping demand curve. So, in case of short run again the monopolistic firm may get a super normal profit or they may get a normal profit or they incur a loss. So, we will analyze where they get a super normal profit where they get a loss and where they just get a normal profit and if you look at this is always on the basis of the average cost and average revenue. So, this is average revenue this is marginal revenue here we will take Q here we will take P average revenue and marginal revenue. We have a average cost we have the marginal cost we will take the point marginal cost marginal revenue we will identify the price and we will identify the cost at that same level. So, this is the cost and if you look at in this case since average revenue is greater than average cost for corresponding level of profit maximizing level of output here the firm is getting super normal profit. Then we will take the case of normal profit when the generally the firm just get the normal profit. So, here again we will take average revenue we will take the marginal revenue we will take the average cost we will take the marginal cost corresponding to marginal cost and marginal revenue we get the equilibrium price we get the equilibrium quantity. And in this case is average revenue is equal to average revenue the firm is just getting the normal profit. Similarly, in case of loss the possibility is that in the short term the monopolistic firm also can get the loss. So, in this case this is the average revenue curve this is the marginal revenue curve this is the average cost curve this is the marginal cost curve following the marginal cost and marginal revenue will get the equilibrium quantity and equilibrium equilibrium price this is the cost. So, this is the amount of the loss what the firm is getting because average cost is more than average revenue increase in this case. So, in the short run the firm may incur loss the firm may just get the normal profit or the firm get also the super normal profit. Next we will see what before going into the short run we will see what happens when the firms get super normal profit or when the firm gets loss. So, short run economic profit encourage the new firms to enter the market increases the number of product offer reduces the demand faced by the firms already in the market and increment firms demand curve shift to the left demand for the increment firm product fall and their profit decreases. So, whenever there is a super normal profit that incentive for the new firms to enter the market that increases the number of products being offer because the new firms will again produce a differentiated product reduces the demand for the existing firm that reduces the profit of the existing firm and finally, they again land into a situation where they just get the normal profit and the entry into the market continues till the time all the existing firm they are not getting the normal profit. If they are getting super normal profit again it is an incentive for the firms to get into the market and produce a differentiated product. Then we will take a case when all the some of the firms they are getting the economic loss or the the firms they are getting economic loss in the short run. So, short run economic loss encourage the firm to exit the market at least for few of them which decrease the number of product offer increase the demand faced by the remaining firm with the exist of few of the firms shift the remaining firms demand curve to the right and increasing the remaining firms profit. So, again it is a transition from the loss to the normal profit and this exit from the market of those firm who are making loss will continue till the time the firms they are not getting the normal profit in the market. Next we will see the price and output determination in the long run. So, the long again in the long run again we follow the same principle we take the marginal cost marginal revenue as the profit to find out the profit maximizing level of output and price and after finding that we find out the price on the basis of the demand curve we find out the cost and the difference between the cost and revenue that gives us the profit loss or whatever may be the outcome. So, in the long run if you look at the super normal profit in the long run attracts the new firm to the industry that leads to loss of market share and the normal profit. So, increasing the number of firm that intensify the price competition between them price competition increases existing firm cut down price to retain or regain the market share new firms lower to penetrate the market and demand curve becomes more elastic. So, let us understand this long run equilibrium that how the demand curve is more elastic when there is a super normal profit in the market. This is marginal cost marginal revenue. This is the price and if you look at at this price the firm is getting the super normal profit because at corresponding to this this is the average cost and this is the average revenue and since average revenue is more than average cost the firm is getting super normal profit. Now, what will happen this super normal profit will attract the new firm into the industry which will reduce the loss of market share and that becomes the normal profit. And to normal profit what we need to find out we need to find out a new set of average revenue curve and the marginal revenue curve. So, this is average revenue one and this is marginal revenue one. So, increase in the number of firm intensify the price competition between them price competition increases the existing firm cut down the price to retain their market power and new firm lower the price to get the profit. So, at this case if you look at corresponding to this marginal cost and marginal revenue all of them they are just getting the normal profit because the average cost is equal to average revenue at this point. So, in the super normal profit so how the generally the sequence of event. So, average revenue marginal revenue is there on that basis they get a super normal profit. Super normal profit attracts the new firm into the market existing firm demand decreases market share decreases and then the new we get a new average revenue curve this is average revenue one and correspondingly we get the marginal revenue curve one. At this with the help of this average revenue and marginal revenue cost function remains same. We get a demand curve we get a profit price level which is again lower than the previous price level and also at this point the average cost is equal to average revenue. So, this leads to the fact that this average cost average revenue brings down the equilibrium level brings down the profit level and the all the firm they just get the just get the normal profit and there is also one more point to note here is that if you look at between the previous average revenue curve and this average revenue curve this average revenue curve is more elastic because all the firms they are following the all the firms they are lowering the price in order to increase the profit existing firm lowering the price to return their market share and the new firm lowering the price to lowering the price to at least penetrate in the market and that overall leads to a lower price in the market. Then there is a again a significant feature of this monopolistic competition is there is some excess capacity is always there in the monopolistic competition as compared to the perfect competition. So, if you look at in case of perfect competitive market structure the firm is equilibrium at the minimum point of the average cost curve whereas, in case of monopolistic competition the firm is equilibrium at the falling portion of the average cost curve and there that brings the excess capacity. So, this if you look at each firm will be equilibrium at the falling portion of the average cost not at the minimum point and this is because of the excess capacity theorem and what is this excess capacity theorem says there is a excess capacity with each firm more output can be produced at a lower cost but generally firm they are producing the output which is less than the full capacity or less than the minimum point. So, we will check this graphically how the monopolistic firm becomes the have some amount of the excess capacity. This is our average revenue curve this is the marginal revenue curve this is the long run average cost curve this is the long run marginal cost curve corresponding to this we get the level of output. So, whether you call it monopolistic output or whether you call it perfect competitive whether you call it monopoly output this is the same profit maximizing level of output whether it is monopoly or monopolistic if you look at they operate at the decreasing portion of the average cost curve. But ideally if you look at always the perfect competitive output is produced at the point where minimum point of the long run average cost curve. So, the difference between these two is generally known as the excess capacity because this much amount of output more could have been produced. But the monopoly market and monopolistic market since they are operating at the decreasing portion of the average cost curve they are not coming to the full or they are not coming to the minimum point of the average cost or they are not coming to the full utilization of the economies of scale or advantage of economies of scale. And they are just stopping their production here that leads to some excess capacity because there is no full utilization and that is why this difference between this QM and QC generally known as the excess capacity in case of the excess capacity in case of the monopolistic and monopoly market structure which is not there at least specifically in case of when it comes to the perfect competitive market structure. And this feature if you will find out it is more in the monopoly and monopolistic rather than any form of the market structure. Then we will talk about since product differences is in their advertising is mandatory the firm has to tell the consumer the firm has to give the awareness to the consumer that how the product is different from the other products in the market because their product is different from the other product. So, the product differentiation is inherent in monopolistic competition and leads to use of advertising and the brand names. Critics argue that firms use advertising and brand names to take advantage of consumer irrationality and to reduce competition. However, the defender argue that the firms use advertising and brand names to inform consumer and to compete more vigorously on price and product quality. So, there is always a two school of thought that whether advertising is positive or advertising is negative, but if you took at the real sense the advertising on to a limiting extent is good till the time it is not maybe not not getting use unnecessarily the advertising in order to attract a market share or in order to use a power. So, when it comes to advertising we know that advertising is necessary if the product is differentiated, but what is the impact of advertising and other cost of production and selling. So, this type of cost incur to sell thus advertising cost and other cost of production selling like selling cost giving free samples, R and D doing a market research all these expenses incur to sell more of a product without reducing the price must be added to the production cost to compute the average cost and contribute to higher price. Till the time all these costs are not getting added in the production cost this cannot be accounted for the calculation of price. So, if this is not getting added the cost of production will increase a price is maintained at the same level the firm is not going to make some the firm is not going to rather they are going to lose some profit. So, this leads to increase in the average cost consumer buys more of the advertised goods however resources are diverted from the production of other goods to provide the advertising. So, ideally when this added into the production cost this also leads to increase in the average cost and consumer buys more of the advertised goods because that is fresh in the other memory or they know that if it is coming as a part of A1S they will see this product in through the different media the they generally buy more of this advertised goods, but the resources are diverted generally from production of word goods to provide the advertising. That is the again the precondition that why generally the cost to be added in the production cost because they are incurring a good amount a large amount of in money on this. So, if you look at till the time the what is the form of competition in the monopolistic market because they are not the price taker they are they have they can influence the price to a bit because their product is different from the other product. On what basis they should compete with each other maybe someone can charge a higher price and always add a quality to it and that can be also sold in the market and someone will charge a lower price, but it is not qualitatively good and that is the reason he survives with a lower price, but apart from this price competition what may be the other factor on what basis such a price is getting this price typical price typical non-price competition takes place in the monopolistic competition. So, two common form of non-price competition one product innovation second one is advertisement. Both go simultaneously the product innovation and the advertisement and cost incur on this selling cost whatever the cost whether it is innovation or it is the product advertisement both add some selling cost. So, there is increase in the selling cost. So, average selling cost initially decreases, but ultimately increases and that is why the average selling cost is used like the average cost. Non-price competition through selling cost list all the firms to an almost similar equilibrium and they are adding the selling cost we can again check what is the firm's group equilibrium when the production cost also consists of the selling cost. So, we will understand the group equilibrium and what is the criticism to chambalize this theory form of monopolistic competition and we will talk about the oligopoly market structure what are the different models in our next session.