Monopolistic competition refers to an imperfect competition where there are many producers selling differentiated products, for instance in terms of quality or branding and therefore not acting as perfect substitutes. In a market with monopolistic competition, a company takes prices that its rivals charge just as given while at the same time ignoring impact that the prices it charges will have on those of the other companies.
This kind of competition describes a market structure where companies face many competitors with each selling a product or products that are slightly different. Edward Chamberlin, an American Economist and Joan Robinson, an English economist identified monopolistic competition in 1930s as one of the market structures.
Most of the small businesses in the current world operate under monopolistic competition environment including high-street restaurants and stores that are operated by the individuals who own them. For instance, there are many restaurants with each offering unique products and services despite the fact that all these businesses compete for similar customers.
There are certain elements or characteristics that can be used to identify monopolistic competition. For instance, in a market with monopolistic competition, every firm or business makes decisions on output and price independently on the basis of its market, products as well as the production costs.
Although there is no perfect spreading of knowledge, information is widely available among participants. For instance, it is possible for diners to review the menus that are available from different restaurants in a single town so that they can make an informed choice. Before making an order, they can review the menu once again while inside a restaurant. Nevertheless, appreciating the restaurant fully is not possible until when diners have dined.
Due to the high risk that comes with making decisions in a monopolistic competition environment, entrepreneurs have significant roles to play in the running of the business. Since major barriers to exit and enter the market do not exist, businesses can freely enter and leave as they please.
Perhaps, the most common feature of monopolistic competition is product differentiation. In this form of competition, four major categories of differentiation exist. These are marketing, physical product, human capital and distribution differentiation. Each firm has the freedom to choose the differentiation that suits its operations.
Advertising is also common in this competition. This is because there is fierce competition from other companies that offer similar service or product. Thus, the companies have to advertise their products to inform customers about their service or product and what makes it different from those of competitors.
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