Characteristics of Monopolistic Competition

The important characteristics of a market operating under monopolistic competition are the following :

Large Number of Buyers and Sellers

There are large number of buyers and sellers of a good in the market. The influence of a single buyer or seller is negligible. The sellers have no mutual interdependence among them. No seller controls a significant portion of the market.

Product Differentiation

This is the most important characteristics of a market operating under monopolistic competition. Here different firms ‘produce similar (not same) products. In other words, the products of different firms are neither identical nor different. They are close substitutes but differentiated products. Differentiation may be real or fancied. Real differentiation is done through the differences in materials used, design, workmanship etc. Fancied differentiation arises when firms offer their products through attractive packing, offering supplementary services. Other factors affecting product differentiation are advertisement, publicity and propaganda, the location of the shop, the lovable and courteous disposition of the salesman or the reputation for fair dealing. All these factors influence the consumer’s preference pattern.

Perfect Knowledge About Market and Technology

All firms in the market have complete information about the demand and supply conditions of their rivals. When a firm changes the price of its product, its quantity demanded changes significantly. So the demand curve of a firm is relatively elastic. It makes the price-output decisions of all firms inter-related. Besides this, each firm has information regarding the technology available to his rivals.

Free Entry and Exit of Firms

Like perfect competition, new firms can enter or the existing firms can leave the market in the long-run under monopolistic competition. This ensures normal profit for all the existing firms in the long run. However in the short-run, the number of firms producing a good in the market is fixed. So the existing firms may get super normal profit or loss in the short run depending on the demand conditions.

Independent Price Policy

In monopolistic competition, the firm fixes the price and has a definite policy for the same. It is the price maker, unlike perfect competition where the firm is merely the price taker. But unlike monopoly, it does not full independence in fixing the price. It takes rival’s price into account.

In monopolistic competition, non-price competition takes the forms of guarantee of repair, after sales, gift scheme etc. This is done to attract the customers for the product.