Monopolistic Competition

- There are many producers competing against each other, but selling products that are
differentiated from one another and hence are not perfect substitutes.
Ex: retail trade such as restaurants and clothing stores

- The differentiation among products or services may be based on real or artificial differences in
quality.

 Real Differences
-refer to palpable differences in quality
o Shape, flavor, color
 Artificial
-quality differences that are not really palpable but buyers are made to imagine or
believe that such differences exist and are important
o Advertising and Marketing of Products

 As long as consumers perceive the products to be different, then the products are different. It
doesn’t matter whether the difference is artificial or real.

Characteristics

1. Contains a large number of sellers

2. Product Differentiation
- Competing companies differentiate their similar products with distinct marketing strategies,
brand names, and different quality levels. 
3. Easy Entry and Exit to the Market
- one firm does not monopolize the market and multiple companies can enter the market and all
can compete for a market share. Companies do not need to consider how their decisions
influence competitors so each firm can operate without fear of raising competition
4. Pricing Power
- Companies in monopolistic competition act as  price makers  and set prices for goods and
services. Firms in monopolistic competition have low but little control over price. They can raise
or lower prices without inciting a price war.

Factors affecting pricing power

1. There still may be many competitors keeping pricing low

2. Product differentiation allows firms to change a different price to reflect any unique qualities
of the product or service.
3. Barriers to entry and exit in the market are low so this requires firms to price competitively.