Monopolistic competition is a type of imperfect competition such that many producers sell

products that are differentiated from one another (e.g. by branding or quality) and hence are not
perfect substitutes.

Examples of monopolistic competition

 Restaurants – restaurants compete on quality of food as much as price.
Product differentiation is a key element of the business. There are relatively
low barriers to entry in setting up a new restaurant.

 Hairdressers. A service which will give firms a reputation for the

quality of their hair-cutting.

 Clothing. Designer label clothes are about the brand and product
differentiation

 TV programmes – globalisation has increased the diversity of tv

programmes from networks around the world. Consumers can choose
between domestic channels but also imports from other countries and new
services, such as Netflix.

Monopolistic competition is a market structure which combines elements of monopoly and competitive
markets. Essentially a monopolistic competitive market is one with freedom of entry and exit, but firms
can differentiate their products. Therefore, they have an inelastic demand curve and so they can set
prices. However, because there is freedom of entry, supernormal profits will encourage more firms to
enter the market leading to normal profits in the long term.

Monopolistic competition
The model of monopolistic competition describes a common market structure in which
firms have many competitors, but each one sells a slightly different product.
 Monopolistic
competition as
a market
structure was
first identified
in the 1930s by
American
economist Edw
ard
Chamberlin,
and English
economistJoan
Robinson.

Large Number of Small Firms

A monopolistically competitive industry contains a large number of small firms, each of which is
relatively small compared to the overall size of the market. This ensures that all firms are relatively
competitive with very little market control over price or quantity. In particular, each firm has hundreds or
even thousands of potential competitors.

Similar, But Not Identical Goods

Each firm in a monopolistically competitive market sells a similar product. Yet each product is slightly
different from the others. The term used to describe this is product differentiation. Product
differentiation is responsible for giving each monopolistically competitive a little bit of a monopoly, and
hence a negatively-sloped demand curve. Differences among products generally fall into one of three
categories: (1) physical difference, (2) perceived difference, and (3) difference in support services

Physical Difference: This means that the product of one firm is physically different from the product of
other firms. The most popular product of Manny Mustard's House of Sandwich is, for example, the
Deluxe Club Sandwich. While many restaurants sell club sandwiches, Manny makes his with barbecue
sauce rather than mayonnaise. It is similar to other club sandwiches, but slightly different.

Perceived Difference: Product differentiation can also result from differences perceived by buyers, even
though no actual physical differences exist. For example, OmniGuzzle gasoline is chemically identically to
Bargain Discount Fuel gasoline. However, many buyers are absolutely convinced that OmniGuzzle is a
"higher quality" gasoline. This could be due to years of intense OmniGuzzle advertising that has burned
the OmniGuzzle brand name into heads of the consuming public. Brand names, in fact, are a common
method of creating the perception of differences among products when none physically exist. However,
perceived differences work just as well for monopolistic competition as actual differences. In the minds
of the buyers, it matters not whether the differences are real or perceived.

Support Service Difference: Products that are physically identical and perceived to be identical, can also
be differentiated by support services. This is quite common in retail trade. For example, several
independent stores might sell Master Foot brand athletic shoes. Buyers know that Master Foot shoes are
the same regardless of who does the selling. No physical nor perceived differences exist. However,
Bobby's Bunyon-Free Footware provides individual service, money-back guarantees, extended
warranties, and service with a smile. Bobby's Bunyon-Free Footware sells buyers the perfect Master Foot
brand athletic shoe that fits an individual's lifestyles. Mega-Mart Discount Warehouse Super Center, in
contrast, has self-service shelves filled with Master Foot brand athletic shoes. Buyers must find their own
sizes. Bobby's Bunyon-Free Footware is thus able to differentiate its Master Foot brand athletic shoe
from those sold by Mega-Mart Discount Warehouse Super Center.

CHARACTERISTIC OF MONOPOLISTIC COMPETITION

RESOURCE MOBILITY

Monopolistically competitive firms, like perfectly competitive firms, are free to enter and exit an
industry. The resources might not be as "perfectly" mobile as in perfect competition, but they are
relatively unrestricted by government rules and regulations, start-up cost, or other substantial barriers to
entry. While some firms incur high start-up cost or need government permits to enter an industry, this is
not the case for monopolistically competitive firms. Likewise, a monopolistically competitive firm is not
prevented from leaving an industry as is the case for government-regulated public utilities.

For example, if Manny Mustard wants to leave the restaurant industry and entry the retail shoe sales
industry, he can do that without restriction. Likewise if the Bobby (of Bobby's Bunyon-Free Footware)
wants to leave the retail shoe industry and enter the restaurant industry, he can do so without restraint.
Manny Mustard and Bobby are not faced with heavy up-front investment costs, such as the construction
of a multi-million dollar factory, that would prevent them from entering a monopolistically competitive
industry and competing on nearly equal ground with existing firms.

EXTENSIVE KNOWLEDGE

In monopolistic competition, buyers do not know everything, but they have relatively complete
information about alternative prices. They also have relatively complete information about product
differences, brand names, etc. Moreover, each seller also has relatively complete information about the
prices charged by other sellers so that they do not inadvertently charge less than the going market price
Manny Mustard, for example, knows that the going price of club sandwiches in Shady Valley is about
$5.50, give or take a little. All of the sandwich buyers know that the going Shady Valley price of club
sandwiches is about $5.50, give or take a little.

Difference Between Perfect Competition and Monopolistic

Competition

Price Determination for Perfect and Monopolistic Competition

In perfect competition, the forces of demand and supply determine the

prices of goods and services. This means that all the firms in that
market sell the products at that price.

The prices of goods and services in a monopolistic competition are

determined by the enterprises in that market. Each company sells
products at its prices.

However, the dominant company in a monopolistic competition has a

ripple effect whereby it can determine the prices of goods and
services in that market.

Difference between price and non-price competition

Price Competition:

Exists when marketers complete on the basis of price. In price

competition, the marketers develop different price strategies to beat
the competition.

They generally set a same or low price of a product than that of the
competitors to gain the market share.

Non-price Competition

Focuses on the factors other than the price of the product. In non-price
competition, customers cannot be easily lured by lower prices as their
preferences are focused on various factors, such as features, quality, service,
and promotion.