Monopolistic competition is a market structure that falls between perfect competition and monopoly. In this type of market structure, there are many small firms producing similar but not identical products.
Each firm has some market power due to product differentiation, but there are no significant barriers to entry, which means that new firms can enter and compete in the market.
This competition results in a high level of innovation and differentiation, as firms must constantly work to differentiate themselves from their competitors.
What are the Characteristics of Monopolistic Competition?
The following are the salient features of monopolistic competition market structure:
1. Differentiated Products
One of the primary characteristics of monopolistic competition is product differentiation. Each firm produces a slightly different product that is unique in terms of quality, design, packaging, or branding.
Product differentiation enables firms to charge slightly different prices for their products and attract a different customer base.
For example, a clothing store may sell clothing items with different styles, colors, and designs, which are unique to their brand.
2. Many Small Firms
Another feature of monopolistic competition is the presence of many small firms.
No single firm has a significant market share, and each firm has only a small portion of the total market demand.
The market is highly competitive, and new firms can enter and exit the market without facing significant barriers.
3. Limited Market Power
Although firms in monopolistic competition have some market power due to product differentiation, their market power is limited.
Firms cannot significantly influence the market price, and they have to compete with other firms in the market.
Due to the presence of many close substitutes, customers can easily switch to a different brand if the price of one brand becomes too high.
4. Non-Price Competition
Firms in monopolistic competition engage in non-price competition to attract customers.
Firms spend money on advertising to create brand awareness and differentiate their products from those of their competitors.
Product differentiation is essential because it allows firms to charge a slightly higher price for their products and increase their profit margins.
5. Relatively Elastic Demand
The demand for the products of firms in monopolistic competition is relatively elastic.
This means that a small change in price can lead to a significant change in the quantity demanded.
Customers have many close substitutes, which means that they can easily switch to a different brand if the price of one brand becomes too high.
Therefore, firms cannot significantly increase their prices without losing customers.
6. A Large Number of Buyers and Sellers
In a monopolistic competition market, there is a large number of buyers and sellers.
Sellers of a commodity or not are in a position to affect the market behavior individually and the buyers purchase the goods as per their preferences.
The number of buyers and sellers is smaller than those of perfect competition in this market.
7. Varying Preferences of Consumers
Under monopolistic competition, sellers are selling varied products that are different in quality and quantity.
Buyers buy these products according to their preferences, income, etc.
Buyers are attracted by the sellers on the basis of the specialized qualities of their products.
8. Short-Run Profit Maximization
In the short run, firms in monopolistic competition can earn positive economic profits if they can differentiate their products sufficiently to attract customers.
However, these profits are not sustainable in the long run because new firms can enter the market and compete with existing firms.
The entry of new firms reduces the demand for existing firms, which leads to a decrease in their profit margins.
9. Advertising and Marketing
10. No Barriers to Entry
There are no significant barriers to entry in monopolistic competition.
New firms can enter and exit the market relatively easily, which means that there is always the potential for new competition.
This competition keeps the market efficient and ensures that firms are continually innovating to stay ahead of their competitors.
11. Facilities for Customers
Under monopolistic competition sellers of a product provide various facilities to their customers so that they are attracted to purchase more of their products, credit facilities, home delivery, and repair facility.
All these facilities attract customers.
12. Existence of Competition and Monopoly Elements
Under monopolistic competition, some of the characteristics of perfect competition are in existence such as a large number of buyers and sellers, and free entry, and exit of firms in the industry.
Hence, we call it midway between perfect competition and monopoly.
13. Efficient Use of Resources
Because there is competition in monopolistic competition, firms are incentivized to use resources efficiently to reduce costs and increase profits.
14. Demand Curve is Highly Elastic
Under monopolistic competition, the demand curve is highly elastic because firms are free to enter and exit the industry.
Thus, we can say that product differentiation is the main character on the basis of which monopolistic competition is recognized as a different market structure.
15. Product Innovation
Firms in monopolistic competition are incentivized to innovate and develop new products to differentiate themselves from their competitors.
Monopolistic competition is a market structure that combines elements of both competition and monopoly.
It is characterized by a large number of small firms producing similar but not identical products, product differentiation, non-price competition, limited market power, relatively elastic demand, short-run profit maximization, and no barriers to entry.
Monopolistic competition provides consumers with a wide range of choices and ensures that firms are continually innovating to stay ahead of their competitors.