What is Monopolistic competition?
Monopolistic competition is a form of market in which there are many sellers of the product, but the product of each seller is different from the other.
A monopolistic firm has partial control over price only through product differentiation. Products are differentiated through designs and the color of the packing of the product. It attracts consumers to buy the product at a higher price. As there are many rivals and close substitutes of products in the market, a monopolistic firm cannot have full control over the price.
Features of Monopolistic Competition
- Under monopolistic competition, different producers try to differentiate their product in its shape, packing and brand name. This is done to attract buyers from rival firms in the market. This is called product differentiation.
- There is a large number of sellers and buyers. The size of each firm under monopolistic competition is small. Each firm has limited share of the market.
- Firms are free to enter the industry and exit it. However, new firms have no absolute freedom of entry into the industry. Some firms have patent rights for a product. New firms cannot produce those products.
- Each firm has to incur selling costs on advertisements to promote its sales. This is because there is a large number of close substitutes in the market.
- Sellers and buyers of products do not have perfect knowledge about the market price. Because of product differentiation, it is not possible to compare the price of different products.
Nature of Demand Curve
Under monopolistic competition, the firm has a negatively sloped demand curve which is more elastic. A large quantity of the product can be sold by reducing its price. It is more elastic than the demand curve of a monopoly firm because of close substitutes available in the market. In the demand curve ‘D’ of a firm under monopolistic competition, the slope indicates high elasticity of demand for the product.
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