Monopolistic Competition

Monopolistic Competition

1. Characerisitcs and Definition

   • Monopolistic competition describes a common market structure in which firms have many competitors, but each one sells a slightly different product.
   • Each firm makes independent decisions about price and output, based on its product, its market, and its costs of production.
   • Knowledge is widely spread between participants, but it is unlikely to be perfect.
   • The entrepreneur has a more significant role than in firms that are perfectly competitive because of the increased risks associated with decision making.
   • There is freedom to enter or leave the market, as there are no major barriers to entry or exit.
   • A central feature of monopolistic competition is that products are differentiated.
     • Physical product differentiation
     • Marketing differentiation
     • Human capital differentiation
     • Differentiation through distribution
   • Monopolistically competitive firms are assumed to be profit maximisers because firms tend to be small with entrepreneurs actively involved in managing the business.