Monopolistic Competition Examples

An example of monopolistic competition includes beauty products that have a very large number of sellers and the products sold by every company which is similar yet not identical these sellers cannot compete on prices as they can charge prices based on the uniqueness of the product they are offering and this business has relatively low barriers to enter and exit the market.

Before going through the examples, let us first understand the meaning of monopoly competition.

• Monopolistic competition is a market structure where many firms sell similar but not identical products, which allows them to have some degree of pricing power due to product differentiation.
• The beauty essentials market presents an example of monopolistic competition where companies compete on product uniqueness rather than price. There are low barriers to entry and exit in the market.
• Real-life examples of monopolistic competition include coffee shops/chains, farmers, and retail industries.
• Unlike firms in perfect competition, firms in monopolistic competition have some control over their prices, but it is limited, and they still face competition from other firms.

Monopolistic competition is a market structure where various firms produce and offer differentiated products and services, which are close but not perfect substitutes for each other. The firms highly compete with each other on multiple factors other than prices.

The following monopolistic competition example outlines monopolistic competition's most common market structure. It is impossible to provide a complete set of examples that address every variation in every situation since there are thousands of such markets. Each real-life example of monopolistic competition states the topic, the relevant reasons, and additional comments as needed.

Example #1 - Coffee Shops or Houses or Chains

Coffee shops, houses, or chains are classic examples of monopolistic competition.

A Large Number of Sellers

Coffee has many sellers, including hundreds of reputed global coffee chains, local coffee houses, and multiple street coffee vendors.

The Product is Similar but not Identical.

Starbucks of the USA, called the king of all coffee chains, has a presence in over 65 countries globally, and Costa Coffee, the best coffee chain in Europe, comes second in world rank after Starbucks.

The two globally reputed coffee chains both sell a similar product, 'coffee,' but the coffee is not the same at both the outlets. A Difference is created by the quality of coffee, customer service or hospitality, and prices. Both the coffee houses are healthy, competing to serve better products and services. However, coffee is not just served by Starbucks or Costa; there are various big global coffee chains other than these two like Dunkin Donuts, McDonald’s, McCafe, etc.

Non-Price Competition

Note that one of the defining traits of a monopolistic competitive market is a significant amount of non-price competition. I.e., firms cannot compete on prices.

For example, a street vendor offers coffee at $0.5 per coffee cup, but Starbucks charges about $5 for a single cup of coffee. Now the street vendor cannot compete with Starbucks based on charging low prices because Starbucks differentiates its product through the quality of its coffee, expensive crockery, better hospitality, the infrastructure of their coffee houses, etc.

Less Pricing Power

Unlike firms in the perfect competition where they have negligible pricing powers and prices are fully dependent on markets, firms in the monopolistic competition have low but little control over costs. Different firms can charge higher or lower based on product differentiation.

For example, Costa Coffee has higher rates than Starbucks, and they both charge much higher prices than a street vendors. However, coffee is very expensive since every coffee seller gets its customers.

Low Barriers to Entry and Exit

Due to a monopolistic competitive market, the coffee business has low barriers to entry and exit. However, the existing or established companies want barriers to be high.

For example, the coffee business has low startup costs, i.e., low capital expenditure on property, plant, and equipment. In addition, many street vendors offer good-quality coffees at cheaper rates served on small food trucks or stalls.

Governmental regulations are less than essential food quality standards; the coffee business has no other strict governmental obligations to be followed.

Example #2 - Farmers

From coffee shops, we next come to coffee producers. This example talks about farmers who produce food for the entire 7.7 billion population of the world and about 80% of the world’s food.

Farmers also work in a monopolistic competitive market where many farmers (around 570 million farmers worldwide) produce similar crops that can differentiate based on quality, size, etc.

Let’s take the example of a very famous summer crop called ‘mango’ (Mangifera indica).

A Large Number of Sellers

India, the largest producer of mangoes, has many mango cultivators.

The Product is Similar but not Identical.

In India, over 1,000 varieties exist, where only 20 are commercially cultivated, and only 5 of them are exported, including Alphonsus.

Product Differentiation

The most important factor in differentiating mangos is quality, whether organic or inorganic. If it is inorganic, the chemicals (including pesticides and chemical fertilizers) affect quality checks.

Less Pricing Power

Generally, the market rates of mango or any other crop are not decided by the farmer. Prices are mainly dependent on demand and supply chain, governmental influences, and a variety of mango. However, being a seasonal crop, demand remains high; thus level of supply inflates or deflates the price structure. Mango being a perishable product, its quality also affects prices.

Low Barriers to Entry and Exit

The business of farming has low barriers to entry. The startup cost is low, excluding land purchasing or if the land is taken on lease. However, the farming business is mostly hereditary worldwide, where the farming lands are inherited from generation to generation. In other cases, the government of every nation provides incentives to new farmers and helps them with money, technology, and education.

Example #3 - Retail Industry

The retail industry is a prime example used by various economists to explain the monopolistic competitive market.

The retail industry consists of vast markets that include various goods and brands with a single common goal of selling their products rapidly.

A Large Number of Sellers

Apart from a large number of small local retailers conducting grocery stores or clothing outlets, there are huge elephant players who are globally popular as well as world leaders of the retail industry like:

Walmart Inc. is the biggest retailer globally and has recently entered into e-commerce by acquiring Flipkart, India’s largest e-commerce company. Amazon is the biggest online retailer in the world. And Alibaba is another major global giant in the retail industry.

Product Differentiation

Companies can differentiate their products by using color, size, features, performance, and accessibility in the retail industry. In addition, companies use heavy advertising and apply various marketing strategies to make their products more appealing to customers than other similar products.

Differentiation can also be made through a better distribution structure. Online selling provides an advantage over other retailers.

Less Pricing Power

Customers have full knowledge about the market, the brand, and the product. Thus sellers cannot artificially inflate product prices. Otherwise, customers will be forced to buy the substitutes of even a well-known brand.

Low Barriers to Entry and Exit

Entry to the retail industry is very easy, and even an individual can enter with the most basic governmental obligations and licensing. The initial cost varies depending on the level of business, e.g., a small grocery store with very basic items requires a very small amount of money, but to start a mall that includes every aspect of retailing needs huge funds.

This article is a guide to the Monopolistic Competition Examples. We have also provided the top real-life monopolistic competition examples with explanations. You may learn more about financing from the following articles: -

• Monopoly Examples
• Oligopoly Examples
• Monopoly vs Monopolistic Competition
• Seller Market