The following points highlight the six major wastes of monopolistic competition. The wastes are: 1. Competitive Advertisement 2. Product Differentiation 3. Expenditure on Cross Transportation 4. Inefficient Firms 5. Excess Capacity 6. Unemployment.
Monopolistic Competition: Waste # 1.
One of the important wastes of monopolistic competition is the incurring of expenditure on competitive advertisement by firms. Excess advertisement adds to costs and prices. Expenditure on packing, colour, flavour, etc. and on media like TV, radio, cinema, newspapers, etc. create unnecessary product differentiation.
As a result, irrational preference for certain brands of products are created in the minds of consumers which tend to push the sales of one firm at the cost of others. Expenditure of competitive advertisement is also resorted to by all firms at least to keep their respective customers attached to their brand of the product. But all such expenditure is socially wasteful.
Monopolistic Competition: Waste # 2.
Another waste of competition is the production of varieties of a product which each firm produces. This is done by creating artificial or imaginary product differentiation so as to distinguish the product of one seller from those of another. This is done by changing the colour, design, fragrance, packing, etc. of the same product by the same producer. For instance, The Brooke Bond Tea Company sells such brands of tea as Green Label, Red Label, Yellow Label, etc.
Thus each firm produces varied assortment of types and qualities for its own customers and often confusing them. Rather than producing only one type of product and charging uniform price, they charge different prices for each brand of the same product. Thus a large number of brands, styles, etc. confuses the consumer and adds to costs and prices, thereby making the products costly. This leads to wastage of resources and to loss of economic efficiency.
Monopolistic Competition: Waste # 3.
Expenditure on Cross Transportation:
The expenditure on cross transport is another waste of monopolistic competition. Each producer tries to sell his products in the far-off markets rather than in the markets near its place of manufacture. This involves huge transport costs and also expenses on advertisement and propaganda. Rather than save these expenses and reduce prices, firms under monopolistic competition prefer to incur expenses on transportation and advertisement. This is apparently wastage of resources.
Monopolistic Competition: Waste # 4.
Under monopolistic competition, there is a large number of inefficient firms. The price charged by each firm exceeds the long-run marginal cost because both the AR and MR curves are downward sloping under monopolistic competition. The firm’s equilibrium condition is Price=LAC>LMC=MR. Therefore, resources are under allocated to firms in the market and misallocated in the economy.
Under perfect competition all firms are of the most efficient size in the long-run because P=LAC=LMC=MR. Moreover, under monopolistic competition, an inefficient firm will have to lower its price in order of sell more and to expand. For this, it will have to lower its average costs per unit. But an inefficient firm may not be in a position to lower its average costs per unit and to lower its price.
Thus such firms may continue to exist on the strength of their customers but without attracting the customers of their rivals. There are a number of small retail shops in every town which depend upon the goodwill of their customers who due to ignorance or transport costs would not like to move to more efficient firms which sell the same product at a lower price. But the existence of such inefficient firms is a social waste.
Monopolistic Competition: Waste # 5.
All firms under monopolistic competition possess excess capacity. Since the demand curve (AR) of a monopolistic competitive firm is downward sloping, its tangency point with the LAC curve will always occur to the left of its minimum point. Thus when the firm is in long-run equilibrium, it underutilizes its optimum scale plant. This leads to the existence of more firms in the industry than required.
All firms work under less than the optimum capacity, and all charge higher than the competitive price. The failure of the firms to produce less than the optimum output due to a downward sloping demand curve is a clear wastage of resources from the point of view of the community.
Monopolistic Competition: Waste # 6.
As a corollary to the above, unutilized resources lead to unemployment when firms under monopolistic competition try to maintain the price of their product instead of maintaining production.
From the above, it should not be inferred that monopolistic competition is sheer wasteful and reduces economic welfare. It has also its merits. For example, informative advertisement is useful for consumers and product differentiation provides the consumer a wider choice of products.