Answer the following question :
What are the features of monopolistic competition ?
a) Fairly large no. of buyers : In this market, there are fairly large number of buyers. Consequently, no single buyer can influence the price of the product by changing his individual demand.
(b) Fairly large no. of sellers : The no. of sellers in monopolistic competition is large. Each seller has a limited control over supply. The seller has complete control over his brand. Thus, they have to face competition from sellers selling close substitutes (other brands) in market .
(c) Product differentiation : Another important feature of this market is that the product produced and sold by various firms (sellers) are not identical but they are slightly different from each other on the basis of their brand name, shape, colour, packing etc. Thus, producers compete with each other on the basis of product differentiation and not on the price differentiation. Therefore, monopolistic competition is also known as no price competition.
(d) Close substitutes : Goods are close substitutes to each other, e.g, pepsi and coca cola.
(e) Selling cost : Product differentiation in monopolistic market leads to emergence of selling cost. The price of product includes the selling cost (advertisement on T. V, radio, exhibitions etc. incurred by producers to increase the sales.
(f) Free entry and exit : There is freedom of entry and exit under this competition, i.e., new firms are free to enter the market, if there is super normal profits and similarly they can leave the market, if they found it difficult for survival.
(g) Demand curve of the firm : Due to product differentiation and availability of close substitutes, demand curve of the firm is highly price elastic and downward sloping.
(h) The firm is the price maker in this market and AR curve > MR curve. AR curve and MR curve both are negatively sloped curves.