Monopolistic competition

Monopolistic completion is a form of market in which there are a set of particular criteria. It could be
said to be in-between monopoly and perfect competition. The criteria include:

 The industry is made up of a fairly large number of firms.

 The firms are small, relative in size to the industry. This means that the actions of a single
firm are unlikely to have a significant effect on the overall industry and its competitors. Each
firm is able to act independently.
 The firms all produce slightly differentiated products. This means that it is possible for a
consumer to distinguish between different firms products.
 There are no barriers to entry or exit from the industry. Allowing firms to enter of leave as
the industry freely.

The difference from perfect competition is that there is product differentiation. Differentiation is
seen when a good is seen/perceived to be different from another product of the same function. This
can include: brand, colour, appearance, packaging, design, service, skill level etc. An example of a
monopolistic competitive industry is hairdressing. There is free entry and it is at least possible that
people know enough about their hairdressing options so that the "sufficient knowledge" condition is
fulfilled. But the products of different hairdressers are not perfect substitutes. At the very least, their
services are differentiated by location. A hairdresser in the Centre of London is not a perfect
substitute for a hairdresser in a alleyway in Crawley, although they may be good substitutes from the
point of view of a customer who lives in the suburbs but works in city centre. Hairdressers' services
may be differentiated in other ways as well.

The adjacent graph shows the

demand for a firm in monopolistic
competition. The firm faces a
downward sloping demand curve
with a marginal revenue curve that
is below it and produces so that it
is maximising profits where
MC=MR. This means that the firm
shown in the diagram will produce
an output of Q and sell that output
at the price of P.

There are also long and short run

monopolistic competition. In short run it is possible to sustain short-run profit or loss situations. In
the long-run however, all firms will end up making normal profits.