What is Monopolistic Competition?

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Monopolistic competition is a market model that somehow lies in between perfect competition and monopoly. Monopolistic competition refers to a market situation where there are many firms selling a differentiated product. There is a competition which is keen, though not perfect, among many firms making very similar products. No firm can have any perceptible influence on the price-output policies of the other sellers nor can it be influenced much by their actions. Thus monopolistic competition refers to competition among a large number of sellers producing close but not perfect substitutes for each other.

Example: Hairdressers, TV Programs, Restaurants.

The important features of monopolistic competition are:

  1. There are a large number of buyers and many sellers. Short-run equilibrium:
  2. Firms under monopolistic competition are price makers. They set their own prices.
  3. Firms produce differentiated products. It is the key element of monopolistic competition.
  4. There is free entry and exit of firms.
  5. Firms compete with each other by incurring selling cost or expenditure on sales promotion of their products.
  6. Non – price competition is an essential part of monopolistic competition.
  7. A firm can follow an independent price policy.