Defects or Wastes of Monopolistic Competition
The many defects of monopolistic or imperfect competition are referred to as wastes of competition. Five kinds of wastes or defects are enumerated. They are: unemployment, excess capacity, cross transport, failure to specialize and advertising. Let us discuss these defects of monopolistic competition and see why they are called wastes of competition.
Though there may be many types of unemployment in the economy, monopolistic competitive condition will aggravate the unemployment conditions. From the figures we have studied already, we can infer that the productive capacity may not be used to the fullest extent and this will result in unemployment of resources in the economy to the fullest possible extent. Monopolistic factors may increase the share of profits in national income which will reduce propensity to consume without creating a comparable increase in the desire to invest.
2. Excess Capacity
Under monopolistic competition, firms will not produce optimum output at the lowest average cost point. According to theories of Chamberlin’s monopolistic competition and Joan Robinson’s imperfect competition, a firm in the long run equilibrium produces an output which is less than socially optimum or ideal output.
Because of imperfect competition, firms produce less than the socially optimum or ideal output, that is, the output corresponding to the lowest point of average cost. This is the contrast to the long run equilibrium under perfect competition which operates at the minimum point of the long run average cost curve. The amount by which the actual long run output of the firm under monopolistic competition falls short of the ideal output, is called the excess capacity. This has not been utilized.
This excess capacity under monopolistic competition is considered wasteful as it arises because of irrational consumer preferences. If the buyer’s preferences are rational, this excess capacity will be reduced by concentrating in fewer varieties.
3. Cross Transport
The existence of cross transport is another factor contributing to waste of monopolistic competition. If firms cater to the needs of the locality, transport expenditure may be minimized. For instance cloth produced in Bangalore will be sold at Ahmadabad and cloth produced in Ahmadabad will be sold at Bangalore. Hence the cost of cloth will be increased necessarily due to transport cost. This wasteful use of transport facilities is the direct result of product differentiation and consumers preferences of variety.
4. Failure to Specialize
Under monopolistic competition, the advantages arising out of specialization is lost. The cost advantage can be had only if the sales are expanded. To some extent, the failure to specialize and the costly maintenance of production is also considered waste in monopolistic competition.
There is a lot of waste in competitive advertisement under monopolistic competition. The wasteful and competitive advertisements lead to high cost to consumers.
Besides, monopolistic competition encourages large number of inefficient firms. Under perfect competition, inefficient firms are eliminated because the market price tends to be equal to the lowest cost and any inefficient firms having a high cost of production may have to leave the industry. Under monopolistic competition, buyer’s preference for some goods enable the inefficient firms to continue to exist. Efficient firms cannot drive out inefficient firms because, the former may not be able to attract the customers of the later.
Thus monopolistic competition is said to posses many defects o wastes.