Example of Reliance to understand monopolistic competition better

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monopolistic competition
We can take the example of Reliance Industries Ltd. to understand Oligopoly first and that will help to understand monopolistic competition better. Reliance Industries ltd., an Indian telecom company, launched Jio Soft on 27 December 2015 to provide telecom services and initially offered the services almost free of cost and thus unleashed the price war. Other telecom companies such as Idea, Vodafone and Airtel had to lower their price to retain their customers. So here all the 4 companies had the same product > voice call and internet data.

The price cut by one company badly affected the other companies as their product was the same. This is what Oligopoly is when a limited number of companies in a particular sector can influence each other's business by manipulating prices or in other ways. Monopolistic competition is simply the opposite of Oligopoly. Here the product is not the same.

For example, if different businesses are selling jeans pants then the product might be the same but still, the design and the type of cloth used in the jeans may differ and so even if one business lowers the price it won't affect the other businesses much who are also making jeans pants.

In Monopolistic competition, there is no substitute for the product of one business with that of the other. For example, if you have the taste for Amul butter you will not substitute it with any other butter as it has a particular taste which you are used to. While in case of things like internet broadband you can easily shift to Reliance from Airtel if it is selling cheaper. That is the major difference.

Though the Amul company may have competition with other butter brands but this competition may not close or affect their business as the customers having the taste of Amul will still buy Amul. This is what the monopolistic competition is. There is a competition but not affecting a particular business in a big way. Many would prefer other butter brands over Amul but still, it cannot affect them when they are also expanding with customers for their particular taste.

Though Oligopoly led to the price war (Reliance example above) which was good for the customers but Oligopoly has it's advantages too. Since Idea, Vodafone, Airtel, and Reliance are only the four major Indian companies offering the telecom services and having the 99% of the market share, if they want these companies can set their own price in the market by collaborating with each other through a cartel, collectively or under the leadership of one firm. But they have to come to the same conclusion as to what price to set and thus having the monopoly in the market with that price.

The customers then will be forced to buy their telecom services at a higher price as almost 99% market share is held by these 4 companies only and no other company in India has the technology for the customers to shift to them. That way Oligopoly has the advantage over the monopolistic competition.

But in the long run, monopolistic competition may have a disadvantage too as when more and more newly launched butter companies will take their share in the market the business of Amul may go down over time as their product is not monopolistic (which no one else can produce) like the telecom services. So in the monopolistic competition, they may have the freedom to increase and set their own price but the reach of their brand may not be too far to have the monopoly in the product and the market share with a broader reach. This is because not only a few companies (like in Oligopoly) but too many companies are involved in the business in monopolistic competition.

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Written by: Rajesh Bihani ( Find me on Google+ )

Disclaimer: The suggestions in the article(wherever applicable) are for informational purposes only. They are not intended as medical or any other type of advice