page_title: Monopolistic competition
hierarchical_section_title: Monopolistic competition
caption_attribution_description: English: Short-run equilibrium of the firm under monopolistic competition. The grey box illustrates en:abnormal profit, though the firm could just as easily be making a loss.
context_page_description: Monopolistic competition is a type of imperfect competition such that many producers sell products that are differentiated from one another and hence are not perfect substitutes. In monopolistic competition, a firm takes the prices charged by its rivals as given and ignores the impact of its own prices on the prices of other firms. In the presence of coercive government, monopolistic competition will fall into government-granted monopoly. Unlike perfect competition, the firm maintains spare capacity. Models of monopolistic competition are often used to model industries. Textbook examples of industries with market structures similar to monopolistic competition include restaurants, cereal, clothing, shoes, and service industries in large cities. The "founding father" of the theory of monopolistic competition is Edward Hastings Chamberlin, who wrote a pioneering book on the subject, Theory of Monopolistic Competition. Joan Robinson published a book The Economics of Imperfect Competition with a comparable theme of distinguishing perfect from imperfect competition.
  Monopolistically competitive markets have the following characteristics:
context_section_description: Monopolistic competition is a type of imperfect competition such that many producers sell products that are differentiated from one another (e.g. by branding or quality) and hence are not perfect substitutes. In monopolistic competition, a firm takes the prices charged by its rivals as given and ignores the impact of its own prices on the prices of other firms. In the presence of coercive government, monopolistic competition will fall into government-granted monopoly. Unlike perfect competition, the firm maintains spare capacity. Models of monopolistic competition are often used to model industries. Textbook examples of industries with market structures similar to monopolistic competition include restaurants, cereal, clothing, shoes, and service industries in large cities. The "founding father" of the theory of monopolistic competition is Edward Hastings Chamberlin, who wrote a pioneering book on the subject, Theory of Monopolistic Competition (1933). Joan Robinson published a book The Economics of Imperfect Competition with a comparable theme of distinguishing perfect from imperfect competition.
  Monopolistically competitive markets have the following characteristics:
  There are many producers and many consumers in the market, and no business has total control over the market price.
  Consumers perceive that there are non-price differences among the competitors' products.
  There are few barriers to entry and exit.
  Producers have a degree of control over price.
  The principal goal of the firm is to maximize its profits.
  Factor prices and technology are given.
  A firm is assumed to behave as if it knew its demand and cost curves with certainty.
  The decision regarding price and output of any firm does not affect the behavior of other firms in a group,i.e., impact of the decision made by a single firm is spread sufficiently evenly across the entire group. Thus, there is no conscious rivalry among the firms.
  Each firm earns only normal profit in the long run.
  Each firm spends substantial amount on advertisement. The publicity and advertisement costs are known as selling costs.
  The long-run characteristics of a monopolistically competitive market are almost the same as a perfectly competitive market.  Two differences between the two are that monopolistic competition produces heterogeneous products and that monopolistic competition involves a great deal of non-price competition, which is based on subtle product differentiation.  A firm making profits in the short run will nonetheless only break even in the long run because demand will decrease and average total cost will increase.  This means in the long run, a monopolistically competitive firm will make zero economic profit. This illustrates the amount of influence the firm has over the market; because of brand loyalty, it can raise its prices without losing all of its customers. This means that an individual firm's demand curve is downward sloping, in contrast to perfect competition, which has a perfectly elastic demand schedule.
caption: Short-run equilibrium of the firm under monopolistic competition. The firm maximizes its profits and produces a quantity where the firm's marginal revenue (MR) is equal to its marginal cost (MC). The firm is able to collect a price based on the average revenue (AR) curve. The difference between the firm's average revenue and average cost, multiplied by the quantity sold (Qs), gives the total profit.
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