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What is Monopolistic Competition?

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  • Written By: Mary McMahon
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  • Last Modified Date: 26 August 2016
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Monopolistic competition is a market in which many competitors provide similar products which can be differentiated on the basis of characteristics which go beyond simple cost. This type of market is extremely common around the world for products at a wide range of price points. There are times at which consumers can benefit from monopolistic competition, while in other cases they may lose out, depending on the product and the details of the market. It is also not uncommon to see markets with a mixture of characteristics and it is somewhat rare to find a market which fits neatly and purely into one economic theory.

A simple example of monopolistic competition can be seen in car sales. Cars are all designed for the same purpose, which is to provide transport for people and goods. However, there are many different types of cars on the market. Consumers can choose between different body types, price points, colors, and so forth. No one car manufacturer dominates the market, with many competitors providing similar products in competition.

When monopolistic competition is present, the market is relatively easy to enter and exit. Individual companies can set prices for their products without influencing prices on the larger market because no companies dominate the market, and consumers clearly perceive that there are what are known as “non-price differences” between products offered by competitors.

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The concept of monopolistic competition was first discussed in the 1930s by economist Edward Hastings Chamberlin. Numerous economists have explored the concept since, in addition to looking at other types of competition and the ways in which such markets function. Since many markets include competing producers, understanding how such producers operate in the market can be important to studying the market as a whole and it may also provide insights which can be used by producers to strengthen their position in the market.

In a market characterized by monopolistic competition, consumers often note that companies work hard to make sure that their products are differentiated and that these differences are used as selling points. For example, manufacturers of mouthwash encourage their consumers to compare their products to others, seek endorsements from dental associations, use distinctive packaging, and take other steps to make their products stand out. It can be noted that in such a market, consumers may be willing to pay more for some products because they believe that there are significant differences which impact quality or performance and make the additional cost acceptable.

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ysmina
Post 3

@ddljohn-- Yea, new firms will keep entering the market, but only if the firms that are already in it are making a profit. If there are so many firms that they stop making profit, new ones won't enter.

If the firms are at a loss, then they're going to start leaving the market, and that will reduce the number of those products on the shelves. So it kind of reaches an equilibrium and balances itself out.

ddljohn
Post 2

I have to take an econ exam that includes this concept in a few days. I thought I'd pitch in and review what I learned at the same time.

Companies that manufacture products in monopolistic competition have to keep improving their products and making them a bit more attractive. The reason is because their sales and profits keep going down due to the intense competition.

I mean, there is no cost of entering a monopolistically competitive market, so new companies enter all the time. When there are more products but the demand is the same, each brand will sell less and will profit less.

It's definitely good for us, because we get better and better products, but it's not fun for the companies competing at all.

turquoise
Post 1

I think monopolistic competition is great, not just for the competitive prices, but because it caters to different tastes, such as with the mouthwash example. I purchase a higher costing mouthwash, not because I think it works better, but because I like the flavor of it the best out of all the others.

I believe that buyers don't just decide based on prices, they decide on their tastes and likes as well. The higher the number of brands and types of products on the market, the easier it will be for buyers to find a product that they really like. I am all for monopolistic competition!

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