Literature review
According to MasterClass staff, 2022), monopolistic competition imposes many constraints on service providers, businesses, and the market. Typically, some companies can improve their adaptability to brand differentiation, resulting in a higher-than-average profit. Additionally, new entrants may not be perceived as substitutes for the departing firms, preventing them from generating revenue. Additionally, even if there are no barriers to entry or exit from the market, monopolistic competition may erect several entry barriers for new small-to-medium-sized enterprises in the real world. According to Krylovskiy (2020), if a company has a strong brand following and strong product differentiation, this may create barriers for new entrants, as it may be challenging to rob these companies of their brand loyalty. In the long run, the assumption of normal profit may be exaggerated due to the profitability observed in monopolistic markets.
Nevertheless, because of the freedom of entry and exit in monopolistic competition, businesses may face increased competition over time even if they earn normal profits. Demand is elastic, and while firms create differentiated products, competition may be fierce, forcing smaller firms to exit the market (Corporate Finance Institute. 2021). Since then, the new trade theory has emphasized the significance of monopolistic competition models (Corporate Finance Institute. 2021). MasterClass staff (2022) reiterates that monopolistic firms must pursue product differentiation strategies to achieve product development. Companies may benefit from a strong brand following and loyalty as customers enjoy new product features. However, even when countries can import and export similar goods, specialization may not be based on conventional theories of competitive advantage. For instance, the United Kingdom can import Italian fashion labels while exporting its own.
Additionally, Krylovskiy (2020) raises the question of whether monopolistically competitive firms can merge and produce a variety of distinct brands or just one. MasterClass staff (2022) asserts that there are numerous possibilities for companies to merge and produce differentiated products. Sakib (2021) provided evidence that the emplyees are not against organizational change though they are mostly concerned about the impacts in their indivisual lives. Different companies rely heavily on their employees’ behaviour. When these monopolistic organizations merge, they may face the issue of each company’s behaviour (Corporate Finance Institute. 2021). Typically, when businesses merge, it’s difficult to predict how they’ll behave, which adds to the uncertainty surrounding these transactions. Even, it has also been observed that moral consumerism is more evident in the food and clothing sectors (Sakib, 2022). Similarly, there are also sectors like those which has some diversified features. However, in most industries, differentiated brands are reasonable for creating the illusion of competition while erecting a barrier to entry for other prospective businesses.
Notably, brand proliferation may act as a deterrent to new firms entering the market. For example, two companies, Proctor and Gamble and Unilever, jointly own nearly 30 brands of soap powder (Krylovskiy, 2020). As a result, it may be difficult for a new entrant to compete against established brands. However, combining distinct brands may result in increased economies of scale. Typically, mergers allow for increased resource allocation and investment, improving specific products and increasing efficiency. In this regard, these mergers may increase brand awareness and loyalty, thereby increasing sales and profit margins despite the disparate behaviours of these companies.