Monopolistic Competition

By Dr Sonal Thukral
DTU
For use by Batch 2020-22; Not for
circulation
 Monopolistic Competition
• It is a market structure characterized by large
number of sellers that sell differentiated
products, which are close but not perfect
substitutes for one another

• Combines elements of both Monopoly and

perfect competition
• Characteristics:
– Large number of buyers and sellers in the industry
– Products – differentiated yet close substitutes
• May have some element of control over price due to the fact that
they are able to differentiate their product in some way from their
rivals – products are therefore close, but not perfect, substitutes
– Entry and exit from the industry is relatively easy – few
barriers to entry and exit
– Goal – profit maximization
– Market conditions are known with certainty
• i.e. demand and cost conditions are known
• Consumer and producer knowledge imperfect
 Why Monopolistic competition has
elements of both Monopoly and
perfect competition?
• The implication of differentiated products in this
market structure is that sellers have some control
over the price of the product, so they act as price
makers , their demand curve is downward sloping
– Hence it brings monopoly element
• However, the discretion of price setting is limited
because of somewhat close substitutes and large
number of sellers in the market.
– Hence, it brings in the element of perfect competition
 Monopolistic Competition
• Restaurants
• Plumbers/electricians/local builders
• Solicitors
• Private schools
• Insurance brokers
• Health clubs
• Hairdressers
• Estate agents
• Diagram!
• Short Run equilibrium
• Long Run equilibrium (Normal profits)
– Excess Capacity (discussed in class)
• Thank You