Monopolistic Competition Examples

Updated on January 30, 2024
Article byTanmay Agarwal
Reviewed byDheeraj Vaidya, CFA, FRM

Examples of Monopolistic Competition

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.

Key Takeaways

  • 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.

Meaning of Monopolistic Competition

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.

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Top 3 Real-Life Examples of Monopolistic Competition

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.

Monopolistic Competition Examples

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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 competitionPerfect CompetitionPerfect competition is a market in which there are a large number of buyers and sellers, all of whom initiate the buying and selling mechanism. Furthermore, no restrictions apply in such markets, and there is no direct competition. It is assumed that all of the sellers sell identical or homogenous products.read more where they have negligible pricing powersPricing PowersPricing power refers to the power of an entity to choose the desired price for its product or service without the risk of losing its demand or customer base. Generally, it is an attribute of companies that are market leaders or monopolies.read more 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 differentiationProduct DifferentiationProduct differentiation refers to making a product look attractive and different from other products in the same class. Marketers highlight the distinguishing features in the product commonly through packaging or a good design, which helps communicate the benefitting factors to the shoppers.read more.

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 Barriers To EntryBarriers to entry are the economic hurdles that a new entrant must face in order to enter a market. For example, new entrants must pay fixed costs regardless of production or sales that would not have been incurred if the participant had not been a new entrant.read more 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 expenditureCapital ExpenditureCapex or Capital Expenditure is the expense of the company's total purchases of assets during a given period determined by adding the net increase in factory, property, equipment, and depreciation expense during a fiscal year.read more 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 chainSupply ChainA supply chain refers to a process beginning with the procurement of raw materials and the production of finished goods and ending with their distribution and sale.read more, 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 Or If The Land Is Taken On LeaseLeasing is an arrangement in which the asset's right is transferred to another person without transferring the ownership. In simple terms, it means giving the asset on hire or rent. The person who gives the asset is “Lessor,” the person who takes the asset on rent is “Lessee.”read more. 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 monopolisticMonopolisticMonopolistic refers to an economic term defining a practice where a specific product or service is provided by only one entity. Hence the entity supplying the product or service has the dominance in its price-fixing and deciding on the market output.read more 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.

Frequently Asked Questions (FAQs)

1. Is Coca-Cola a monopolistic competition? 

Coca-Cola is not a monopolistic competition because it operates in an oligopoly market structure. Oligopoly is a market structure where a few large firms dominate the market and can influence prices. Coca-Cola competes with other major soft drink brands such as Pepsi, Dr. Pepper, and Sprite.

2. Is Apple a monopolistic competition? 

Apple operates in a monopolistic competition market structure. Apple competes with other major tech companies such as Samsung, Microsoft, and Google. However, Apple has a unique brand identity and a strong market position that allows it to charge premium prices for its products.

3. How does monopolistic competition affect consumers and their purchasing decisions?

In monopolistic competition, firms offer differentiated products that are not identical but can be substituted for each other. This gives consumers more choices, but it also means that they may be willing to pay higher prices for the unique features of a particular product. Monopolistic competition can also lead to advertising and marketing efforts to differentiate products, influencing consumer purchasing decisions. However, the competition can also encourage firms to improve their products and innovate to stay ahead of their rivals, which can benefit consumers.

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