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.