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Forms of Market Structure-Monopolistic Competition

Monopolistic Competition

  • Monopolistic competition is a situation in which the market, basically, is a competitive market but has some elements of a monopoly.
  • In this form of market there are many firms that sell closely differentiated products.
  • The examples of this form of market are Mobiles, Cosmetics, Detergents, and Toothpastes etc.

Features

Large number of buyers and sellers

  • In this form of market, while the buyers are as large as it is under perfect competition or monopoly, the number of sellers is not as large as that under perfect competition.
  • Therefore, each firm has the ability to alter or influence the price of the product it sells to some extent.

Product Differentiation

  • Under Monopolistic Competition products are differentiated. This means that though the product is same, brands sold by different firms differ in terms of packaging, size, colour, colour features etc. For example – soaps, toothpaste, mobile instruments etc.
  • The importance of Product Differentiation is to create an image in the minds of the buyers that the product sold by one seller is different from that sold by another seller. Products are very similar to each other, but not identical.
  • This allows substitution of the product of one firm with that of another. Due to a large number of substitutes being available Demand for a firm’s product is relatively elastic.

Selling Costs

  • As the products are close substitutes of each other, they are needed to be differentiated and for this the firms incur selling cost in making advertisements, sale promotions, warranties, customer services, packaging, colours and brand creation.

Free Entry and Exit of firm

  • Like perfect competition, free entry and exit of firms is possible under this market form. Since there are no barriers to entry and exit, firms operating under Monopolistic Competition, in the long run, earn only normal profits.

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