Question

Explain any four features of monopolistic competition

Answer 1

According to Prof. Chamberlin, “Monopolistic competition refers to competition among a large number of sellers producing close but not perfect substitutes”. He coined the concept in his book “Theory of Monopolistic Competition” published in 1933. In a monopolistic competition, there are a large number of sellers who sell similar products (not perfect substitutes).

The following are the features of monopolistic competition:

1. Fairly Large Number Of Sellers: There are a fairly large number of sellers in a monopolistic competition. However, it is not as large as the number of sellers in perfect competition. Due to this reason, sellers’ behaviour is like monopoly.

2. Fairly Large Number of Buyers: There are a fairly large number of buyers in the monopolistic competition. Therefore, an individual buyer is not in a position to influence the market price by changing his demand.

3. Product Differentiation: Product differentiation is the main feature of monopolistic competition. It means each product in this market is different from other products in some way or the other. The difference could be in the form of brand name, trademarks, shape, quality, ingredients used, packaging, design, colour, smell, etc. The products are different but they are close substitutes to each other, i.e., cross elasticity of demand is very high.

E.g.: Lee jeans, Levis Jeans, Wrangler Jeans, etc. are all jeans but they have certain differences which distinguish one from the other. At the same time, jeans of different brands are close substitutes for each other.

4. Free Entry And Exit: Under monopolistic competition there is freedom of entry and exit. It means new firms are free to enter the market if there is profit. Similarly, they can leave the market, if they find it difficult to survive.