What Is Monopolistic Competition?

Monopolistic competition describes an industry in which numerous companies offer similar but not identical products or services. In a monopolistic competitive industry, entrance and exit barriers are minimal, and one firm’s choices have little impact on its competitors. Monopolistic competition is directly linked to the brand differentiation business strategy.

Monopolistic competition is a type of imperfect competition such that many producers sell products that are differentiated from each other. Common example can include restaurants that are selling same type of food but they all have different chef thus the taste of food is different.

Monopolistically competitive markets exhibit the following characteristics:

  1. Each firm makes independent decisions about price and output, based on their cost of production.
  2. Knowledge about pricing is widely known but not perfect. Since products are differentiated too, firms can apply markup to their products even though they seems the same. For example, restaurant with tasty food can sell their food at a higher price compared to other normal restaurant.
  3. There is freedom to enter or leave the market, as there are no major barrier to entry or exit like monopoly.
  4. Monopolistic firm follows the MC=MR rule to maximise profit. not P=MC which is followed by perfect competition.
  5. There are usually a large numbers of independent firms competing in the market.