Monopolistic competition is a market structure that falls within the range of imperfect competition i.e. falls between perfect competition and pure monopoly. It is therefore a market structure that combines the aspects of perfect competition and those of a monopoly.
Since it is not possible to have a market that is perfectly competitive or a market that is pure monopoly in real world, all market structures in real world lie between the two and are thus known as imperfect market structures.
In a monopolistic market, there are many sellers of a similar product which is made to look different. This is known as product differentiation. These similar products are made different through packaging, design, colour, branding e.t.c
The following are the assumptions of a monopolistic competition.
- A large number of sellers; Who operate independently.
- Differentiated products; Each firm manufactures a product which is differentiated from that of its competitors, yet they are relatively good substitutes of each other. The differences may be real in that different materials are used to make the product or may be imaginary i.e. created through advertising,branding,colour,packaging e.t.c
- No barriers to entry or exit from industry; There is freedom of entry into the industry for new firms and for existing firms to leave the industry.
- Firms set their own prices; The prices are set depending on the costs incurred in production and the demand in the market.
- No firm has control over the factors of production; Each firm acquires the factors at the prevailing market prices.
- Presence of non-price competitions; Since products are close substitutes of each other, heavy advertising and other methods of product promotion are major characteristics of firms in monopolistic competition.
- Buyers and sellers have perfect knowledge of the market.