Meaning: -The Concept of Monopolistic competition was introduced by E.H Chamberlin in his book “Theory of Monopolistic competition” Monopolistic competition refers to a market structure, in which a large number of firms sell a differentiated product. “The competition is keen among many firms making or producing very similar products.” Thus, Monopolistic competition refers to the competition among large number of sellers producing close but not perfect substitutes to each other. There exists competition among large number of sellers. At the same time, they have some degree of Monopoly power in the market, as they sell differentiated product.
Features of Monopolistic competition are
1. Large number of sellers: - There are many sellers or firms in a monopolistic competition. A single seller is not large enough to influence the market. Each one may, to a certain extent, follow an independent price and output policy without disturbing others.
2. Product Differentiation: - Product is differentiated in monopolistic competition. Products differ from each other in many ways. Product differentiation can be take place in the form of brand name and trade mark. Products may be differentiated in terms of colour, size, design, taste, etc.
3. Close substitutes: - Even though the products are differentiated, they are very close substitutes. For example, as far as brands are concerned, there are many close substitutes for products like soaps and garments. However they are not perfect substitutes as in perfect competition.
4. Selling cost: - firms in a monopolistic competition promote sales by incurring selling cost. Selling cost includes all types of costs incurred to promote sales. Selling cost is usually incurred in the form of advertisement, exhibitions, gifts, free samples and so.
5. Freedom of Entry and Exit: - Another important feature of monopolistic competition is the freedom of entry and exists of firms. A firm is free to enter the market to produce which is a substitute for the existing products. There exist freedom of entry and exit of firms in the market.
6. Price Maker: - Under Monopolistic competition the firm is a price maker. The firm has some control over the price cue to product differentiation. Thus, there are price differentials between the firms producing close substitutes.
7. Nature of demand curve: - The demand curve for the products of each firm is downward sloping. This means that an individual firm can sell more by reducing the price.
8. Two dimensional competitions: - Under Monopolistic competition, the competition among the sellers take place in two dimensional.
i. Price competition: - Under Price competition the firms compete with each other by lowering the price of the product to take advantage of higher sales.
ii. Non Price competition: - Under Non price competition the firms compete with each other by making variation in the product or through selling cost. Through this each seller tries to capture the market.
