Monopolitic Competition in Hair Salon Industry free essay sample

The model of monopolistic competition describes a common market structure in which firms have many competitors, but each one sells a slightly different product. If there was no differentiation, the competition would turn into perfect competition. In effect, monopolistic competition is something of a hybrid between perfect competition and monopoly. Comparable to perfect competition, monopolistic competition contains a large number of extremely competitive firms. However, comparable to monopoly, each firm has market control and faces a negatively-sloped demand curve. Monopolistic competition as a market structure was first identified in the 1930s by American economist Edward Chamberlin, and English economist Joan Robinson. In Pakistan, most small businesses operate under conditions of monopolistic competition, including independently owned and operated high-street stores and hair dressers and even restaurants. In the case of restaurants, each one offers something different and possesses an element of uniqueness, but all are essentially competing for the same customers, thus the high level of competition prevails. In this report, Hair dressing salons are being taken as an example. Characteristics of a firm facing monopolistic competition. Monopolistically competitive markets exhibit the following characteristics: 1. Each firm makes independent decisions about price and output, based on its product, its market, and its costs of production: The various hair dressing salons in the city have different prices as there are different costs (fixed and variable – Rent, staff, hair care products) in different salons. Moreover, each hair dresser tries to differentiate its product based on branding. 2. Knowledge is widely spread between participants, but it is unlikely to be perfect: For example, customers can review all the services available from hair dressers in the city, before they make their choice. Once at the venue, they can gain knowledge about the services again. However, they cannot fully understand the services until after they have experienced it. 3. The entrepreneur has a more significant role than in firms that are perfectly competitive because of the increased risks associated with decision making. The salon has to be careful about their pricing as the customer base for all the hairdressers is essentially the same. A pricing or promotional move by the competition might encourage the existing firm’s clients to move to the other hairdresser. 4. There is freedom to enter or leave the market, as there are no major barriers to entry or exit. There is nothing stopping people from opening more hair salons, as there are no governmental regulations that discourage it and people are always looking out for something new and improved in this industry. 5. A central feature of monopolistic competition is that products are differentiated. There are four main types of differentiation: 1. Physical product differentiation, where firms use size, design, colour, shape, performance, and features to make their products different. For example, consumer electronics can easily be physically differentiated. 2. Marketing differentiation, where firms try to differentiate their product by distinctive packaging and other promotional techniques. For example, breakfast cereals can easily be differentiated through packaging. 3. Human capital differentiation, where the firm creates differences through the skill of its employees, the level of training received, distinctive uniforms, and so on. 4. Differentiation through distribution, including distribution via mail order or through internet shopping, such as Amazon. om, which differentiates itself from traditional bookstores by selling online. In hair dressing salons, Human capital differentiation takes place. For instance, the staff from Depilex sends their employees for trainings abroad, thereby enhancing their skillset and differentiating their services. Nabilas uses promotions and celebrity endorsements to differentiate theirs. 6. Firms are price makers and are faced with a downward sloping demand curve. Because each salon gives a unique, differentiated service, it can charge a higher or lower price than its rivals. The salon can set its own price and does not have to ‘take it from the industry as a whole, though the industry price may be a guideline, or becomes a constraint. This also means that the demand curve will slope downwards. 7. Firms operating under monopolistic competition usually have to engage in advertising. Hair salons are often in fierce competition with other salons offering a similar product or service, and may need to advertise on a local basis, to let customers know their differences. Common methods of advertising for these firms are through local press and radio, local cinema, posters, leaflets and special promotions. There are various billboards all over the city promoting hair salons in Islamabad. 9. Monopolistically competitive firms are assumed to be profit maximizers: Hair salons tend to be small in size and scale. With entrepreneurs actively involved in managing the business and usually being present themselves to ensure their business is working satisfactorily. 10. There are usually a large numbers of independent firms competing in the market. As previously mentioned, there are no big barriers to entry. And since people want premium hair dressing services, more and more hair dressing salons are opening in the twin cities.