Monopolistic Competition

Monopolistic competition is a market system in which numerous companies compete in a given

industry and produce similar but distinct products and compete mainly on non-price
competition. In this situation, sellers compete among themselves and can differentiate their
goods in terms of quality and branding to appear unique, and each company operates
independently of the activities of other enterprises, resulting in a perfect example of imperfect
competition.
The characteristics of monopolistic competition include the following:
• The presence of many companies
• Each company produces similar but differentiated products
• Companies are not price takers
• Free entry and exit in the industry
• Companies compete based on product quality, price, and how the product is marketed
In terms of time, short term and long term monopolistic competition are two distinct elements
wherein monopolistic companies make economic profits and enjoy all of the benefits as a
monopoly in the short term. The economic profit that is earned in the short term attract more
entries, resulting in increased competition, reduced prices, and higher output in the long run.
Marginal revenue (MR) declines over time when new competitors enter the market with unique
offerings, influencing demand and resulting in lower profit. Collusion between companies here
in monopolistic competition is impossible since companies in a monopolistic market structure
are both productively and allocatively inefficient since they operate with existing excess
capacity Because there are so many companies, each one has a little market share and can't
impact the price of the product. Furthermore, monopolistic competition thrives on variety and
innovation. To appeal to their target consumers, companies must continue to engage in
product development and advertising, as well as expand the diversity of their products. Quality,
price, and marketing are thus used to compete with other businesses.
Examples of industries in monopolistic competition include the following:

 Clothing and apparel

 Sportswear products
 Restaurants
 Hairdressers
 PC manufacturers
 Television services