Selling cost in monopolistic competition

Selling cost in monopolistic competition


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1. SELLINGCOSTINMONOPOLISTICCOMPETITION
Sellingcostsrefertothoseexpenseswhichareincurredforpopularizingthe
differentiatedproductandincreasingthedemandforit.Sellingcostisaspecial
featureofmonopolisticcompetition.Underperfectcompetitionduetohomogeneous
productandundermonopolybecauseofabsenceofsubstitute,thesellingcosts
becomeunnecessary.
Themostimportantinstrumentbywhichafirmcan
convinceitsbuyersaboutthedifferentiatingnatureofitsproductisadvertising.Such
expenditurewhichisincurredbyafirmundermonopolisticcompetitiontopersuade
customerstopreferitsproducttothatofitsrivalsisknownas‘selling
costs’.AccordingtofamousAmericaneconomist,EdwardChamberlin,SellingCosts
areCostsincurredinordertoalterthepositionorshapeofdemandcurvefora
product.Suchsellingcostsmaybeincurredinanyformsuchasadvertising,sales
promotion,samplestopotentialcustomersetc.Whateverbetheform,sellingcosts
aimatraisingthedemandfortheproductandchangingthepositionandtheshapeof
demandcurve.
ProductionCostsv/sSellingCosts
Productioncostisthecostofdirectlabor,directmaterials,andmanufacturing
overheadthatareconsumedtocreateaproduct,whereas,SellingCostisthe
expensesincurredinthemarketinganddistributionofaproduct.

2. Produ
ctio
nCost
Sel
lin
g
Cos
t
1. Incurred
under all
types
of
market
categor
y
1. Peculiar
to
Monopolis
tic
Competit
ion
2. Influence
supply
side
2. Influence
demand
side
3. Tomeet
demand
3. Tocreate
demand
4. Some
element
of
proporti
onalit
y
between
product
ion cost
and
output
4. No
definite
proporti
onalit
y
between
selling
cost and
sales
promotion
.
5. Need not
be
consider
ed as
items of
waste.
5. May be
consider
ed as
items of
waste.
Aresellingcoststobeconsideredasitemsofwaste?

3. Wecanprepareacaseonbothsides;
1.SellingCostsaswasteful
2.Notnecessarilyaswasteful.
Sellingcostsmaybeconsideredasitemsofwasteforfollowingreasons:
 Retaliation:i.e.whenonefirmincurssellingcosttopushupthesalesofits
product,theotherfirmswillalsoresorttoadvertisementtopushuptheir
sales.Thisalmostleadstoadvertisementwarfarewhichwouldbeconsideredas
anitemofwaste.
Riseinprice:Sellingcostsareitemsofcost.Whencostisincurreditwillhave
tobecovered.Thiscouldbethroughriseinprice.
Misleading:Sellingcostsmaymisleadtheconsumersaboutthenatureofquality
ofproduct.Thiswouldbeconsideredsociallyundesirable.
Cross-transport:Itmayleadtheconsumersfromoneregiontogotootherregion
topurchasetheproductofhischoicebeingguidedbyitsadvertisement.
 Noteffective:Afirmmaykeepincurringsellingcostwithoutpromoting
sales.Thisiswasteful.
However,sellingcostsneednotnecessarilybeconsideredasitemsofwaste
forfollowingreasons:
 Sellingcostsareoftwotypesviz.InformativeandPersuasive.Informative
sellingcostsmaketheconsumersawareabouttheentryofnewfirm,newproduct
oranychangeintheproduct.Thisiseducativeroleofsellingcostandshouldnot
beconsideredasanitemofwaste.

4. Sellingcostsinvolveadvertisement,publicity,salesmanshipetc.,allthesehave
becomeindustryontheirown.Theycreatelargescaleemploymentandhence
cannotbetreatedasanitemofwaste.
 Sellingcostscreatedemand.Tomeetthedemandthefirmhastoproduce
more.Whenproductionexpands,theaveragecostofproductionfallsandhence
pricesneednotberaisedbecauseofsellingcost.Thussellingcostsneednotbe
consideredasitemsofwaste.