Monopolistic competition is a market structure in which there are many seller producing differentiated products.
- Each firm has some control over its pricing due to product differentiation, but there is also competition because of the availability of close substitutes.
- Perfect competition and monopoly are rare phenomenon in the real world but Monopolistic Competition is close to real business world.
Features of Monopolistic Competition
1.) Many Sellers and Buyers
- A large number of firms operate in the market, and each has a small share of the total market.
- Buyers have multiple choices due to the variety of products available.
2.) Product Differentiation
- Firms offer similar products but with differences in quality, branding, design, or features.
- Examples: Restaurants, clothing brands, and cosmetic products.
3.) Freedom of Entry and Exit
- New firms can enter the market easily, and existing firms can leave without significant barriers.
- This ensures no firm can earn excessive long-term profits.
4.) Some Control Over Price
- Firms have some pricing power because of product differentiation.
- However, this power is limited because close substitutes are available.
5.) Non-Price Competition
- Firms focus on advertising, packaging, customer service, or brand loyalty to attract customers rather than competing solely on price.
6.) Independent Decision-Making
- Each firm makes independent decisions regarding pricing and production without directly affecting competitors.
7.) Normal Profits in the Long Run
- In the long run, as new firms enter the market, economic profits are eroded, and firms earn only normal profits.
8.) Imperfect Information
- Consumers may not have complete knowledge of all products, often relying on advertising and brand reputation to make decisions.
