Monopolistic competition is a type of imperfect competition such that many producers sell products that are differentiated from one another as goods but not perfect substitutes. In monopolistic competition, a firm takes the prices changed by its rivals as given and ignores the impact of its own prices on the prices of the firm.
Characteristics of monopolistic competition
1. Each firm makes independent decisions about price and output, based on its product, its market, and its cost of production.
2. Knowledge is widely spread between participants, but it is unlikely to be perfect.
3. The entrepreneur has a more significant role than in firms that are perfectly competitive because of the increased risks associated with decision making.
4. There is freedom to enter or leave the market, as there are no major barriers to entry or exit.
5. A central feature of the monopolistic competition is that products are differentiated. There are four main types of differentiation:
a. Physical product differentiation : where firm use size, design, color, shape, performance, and features to make their products different. For example, consumer electronics can easily be physically different.
b. Marketing differentiation: where firms try to differentiate their product by distinctive packaging and other promotional techniques.
c. Human capital differentiation: where the firm creates differences through the skill of the employees, the level of training received, distinctive uniforms, and so on.
d. Differentiate through distribution: including the distribution via mail order or through internet shopping, such as amazon.com, which differentiate itself from traditional bookstores by selling online.
6. Firms are price makers and faced with a download sloping demand curve. Because each firm makes unique product, it can charge a higher or lower price than its rivals. The firm can set its own price and does not have to take it from industry as a...