Question

Why is a firm under monopolistic competition called a price-maker?

‘Under monopolistic competition seller is the price-maker.’ Explain.

Answer 1

• A firm under monopolistic competition is called a price-maker because it produces a differentiated product and operates in a market with a fairly large number of sellers, each having a small share of total market output.
• This means that the actions of one firm have little or no effect on its competitors, allowing it to make independent pricing decisions. Since the products are not perfect substitutes, each firm enjoys some degree of market power and can set its own price without worrying much about rival firms’ reactions.
• Unlike perfect competition, where price is determined purely by market forces, in monopolistic competition, firms have the freedom to set prices based on their own cost, demand, and product appeal.
• Hence, due to product differentiation and limited competition, a firm in monopolistic competition is regarded as a price-maker.