Monopolistic Competition

Monopolistic competition is a type of imperfect competition in which many producers sell their products that are differentiated from one another in terms of branding or quality. And so these products cannot be perfect substitutes. Monopolistic competition is a form of imperfect competition. Found in many real world markets ranging from of sandwich bars and coffee stores in a busy town centre to pizza delivery or hairdressers in a local area. Diminutive nurseries and old homes might also fit into the market structure known as monopolistic competition since they do not have any other substitute.

Monopolistic competition is similar to perfect competition and in most cases they happen to be more realistic, because the products are differentiated

New firms will be drawn towards these profit opportunities and will choose to enter the market in the long‐run. In contrast to a monopolistic market, no barriers to entry exist in this market; hence, it is quite easy for new firms to enter the market in the long‐run.

The entry of new firms leads to an increase in the supply of differentiated products, which causes the firm 's market demand curve to shift to the left. As entry into the market increases, the firm 's demand curve will continue shifting to the left until it is just tangent to the average total cost curve at the profit maximizing level of output, as shown in the diagram. At this point, the firm 's economic profits are zero, and there is no longer any motive for new firms to enter the market. In the long‐run, the competition brought about by the entry of new firms will cause each firm in a monopolistically competitive market to earn normal profits, similar to perfectly competitive

Features of Monopolistic Competition:

1. Large Number of Sellers:

There are large numbers of firms selling closely related, but not homogeneous products. Independent firms having limited share in the market. Hence, individuals will be having limited contribution in the market. Large number of firms leads to competition in the market.

2. Product Differentiation:

Each firm is in a position to exercise some degree of monopoly (in spite of large number of sellers) through product differentiation. Product differentiation refers to differentiating the products on the basis of brand, size, color, shape, etc. The product of a firm is close, but not perfect substitute of other firm. Buyers are therefore willing to pay different prices from the same product that is produced by different firms, giving the individual to influence the market price of its product.

3. Selling costs:

Under monopolistic competition, products are differentiated and these differences are made known to the buyers through selling costs. Due to this reason, selling costs constitute a integral part of the total cost under monopolistic