Monopolistic Competition Market
Monopolistic competition is a market structure that combines elements of monopoly and perfect competition. It is characterised by many firms, free entry and exit, and product differentiation, so that each firm has some degree of market power. The concept was developed by Edward Chamberlin and Joan Robinson in the 1930s.[1]
Characteristics
| Feature | Description |
|---|---|
| Number of firms | Many. |
| Product differentiation | Products are similar but not identical, giving each firm some price-setting power. |
| Free entry and exit | Firms can enter or leave the market in the long run. |
| Non-price competition | Firms compete through branding, quality, and advertising. |
Long-run equilibrium
In the short run, a monopolistically competitive firm may earn positive economic profit by behaving like a monopolist. In the long run, however, entry of new firms erodes profit until it reaches zero, and the firm's demand curve shifts leftward until it is tangent to the average cost curve. At this point, price equals average cost but exceeds marginal cost, so the outcome is not allocatively efficient, and firms operate with excess capacity.[1]
Comparison with other structures
| Structure | Firms | Product | Long-run profit |
|---|---|---|---|
| Perfect competition | Many | Homogeneous | Zero |
| Monopolistic competition | Many | Differentiated | Zero |
| Oligopoly | Few | Homogeneous or differentiated | Positive possible |
| Monopoly | One | Unique | Positive possible |
Real-world examples
Monopolistic competition is common in retailing, restaurants, clothing, and consumer services, where many firms sell similar but differentiated products. Non-price competition through advertising and branding is a prominent feature of these markets.[1]