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