The selling of differentiated products by a large number of producers so that there are not perfect substitutes is called monopolistic competition. In the technical language, the term is the combination of the elements of monopoly and competitive markets.
If we look closely to the term monopolistic competition, it is the combination of two words, monopoly and competition. In monopolistic competition, every company have the freedom of entry as well as an exit as it is the sole producer of a particular brand or product. But the main thing is they can differentiate the list of the products. The freedom of the entry and exist is due to the inelastic demand curve. The main features of monopolistic competition are as follows-
The high number of buyers and sellers in the competition-
Every firm has limited control of the market and market share. But such firms are very large in number selling differentiated products resulting in a hike in the competition. This also leads to decreased control over the market price. But the firms have the freedom of choosing their own independent price policy.
What if a firm reduces its price?
The result of this step would be the gain in the sales which spreads over the rivals for reducing the extent at which every firm suffers. This implies that there should not be any reaction of the firms.
The difference in the products-
The products differ on the basis of the quality as well as branding. This is done intentionally in order to draw a line between the products to introduce some changes in them. Therefore, the companies involved here have the monopoly of the products they are producing.
There are two types of differentiation in the products. These are-
The elements of the real differences are skill, material, design etc. Whereas, the components of imaginary differences are trademarks and they are also introduced through advertising.
Cost of selling the products-
What is the main purpose of a monopolist?
Earning maximum profits, obviously. But how to do so when all the firms are into selling similar products? The adjustment of the types of expenditures is the answer. Moreover, the most common aspect of the business is its advertisement.
The absence of perfect knowledge-
No entity of monopolistic competition, neither the buyer nor the seller has the perfect knowledge about the conditions of the market. The reason behind so is the difficulty level among the buyers about the evaluation of the selling cost of the product.
The issue in mobility-
Under monopolistic competition, the two main factors are the production of goods and services; they have less mobility.
Sale and the price of the products are two entities which are inversely proportional to each other. The lower is the price; the higher is the sale of the product.
Flexible entry and exit of the companies-
The firms in the competition entries in the competition freely as well as have the freedom of existing it. What is the perfect time to make an entry into the competition? It is when the existing firms are making super-normal profits. This might increase in the supply of the goods and services by the firms resulting in a decrease in the profits. The outcome of this state commonly is the gain of normal profits only.