Average and Marginal Revenue curve under Monopolistic competition for a firm is represented by the downward sloping curves but in this case, MR< AR. The basic difference between Monopoly and Monopolistic competition is that the AR curve under monopolistic competition is more elastic.
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Revenue Curve under Monopolistic Competition:
Under Monopolistic competition, the market involves features of both perfect competition and monopoly. It is more common than in the other two markets. Furthermore, in this type of market, there are a large number of sellers having products with some differentiation to create a monopoly in the market. As a result, there wouldn’t be more close substitute and competitive product in the market. It implies that if a monopolist firm wants to sell more in the market, it can reduce the price of the product. Under this type of market, the firm’s average revenue curve slopes downward from left to right.
Being a single seller of the differentiated product in the market, the monopolist can fix the price whatever he wishes to. But, he can sell more of his products only at less price. Thus, there is a negative relationship between the demand for a product and its price in the monopoly market. Accordingly, the firm’s AR curve or demand curve or price line slopes downward. As there is a lack of close substitute for monopoly product and availability of close substitute for a monopolistic firm. Therefore, the AR curve is more elastic than in Monopoly. Also, if the AR curve slopes downward, the MR curve also slopes downward, and faster than the AR curve. So that MR<AR.
It can be well explained with the help of tabular and graphical representation:
The following schedule illustrates the behaviour of AR, MR and TR in monopolistic competition:
AR = TR/Q = Price
TR = AR*Q
MR = TRn– TRn-1
The above table shows that the monopolistic firm sells 5 units of a product when the price is Rs.16 per unit. If it increases its price to Rs.17, he can sell only 4 units. Similarly, as he tries to increase the price, the demand for the same would decline.
On the other side, in a monopolistic market, if a firm wants to sell more units, it will lower the price of the product. In the table, it is evident that if the firm increases the sales from 1 unit to 2 units, the price would be reduced to Rs.19 from Rs.20. Likewise, the increment in sales to 3,4 and 5 units results in a reduction in prices to Rs.18, Rs.17 and Rs.16 respectively.
In fig, X-axis shows the output and Y-axis shows the average revenue and marginal revenue. Here, AR shows the average revenue curve and MR shows the marginal revenue curve. The point A indicates equal AR and MR. Furthermore, the AR curve slopes downward showing less price with an increase in sales of output. It represents that a monopolistic firm must lower the price or AR of product to sell more of it. Also, If AR falls, MR would also fall but faster than the AR resulting in MR < AR.
The difference between the monopoly and monopolistic competition is that under monopolistic competition, the AR curve is more elastic. It means that in response to a given change in price, the change in demand will be relatively more for a monopolistic competitive firm than monopoly firm. It is because of the availability of close substitutes in monopolistic competition and there is no close substitute in monopoly.