So, monopolistic competition is characterized by differentiated products (promoted by advertising), a relatively large number of seller, easy entry and exit from the industry. First characteristic is an aspect of monopolistic industry, but second and third are an aspect pure completion industry. In general monopolistically competitive industries are more competitive then monopolistic.
In this type of market system, in contrast to pure competitive one, products diverse, that’s why we say that monopolistic competition is described by product differentiation. So firms produce variations of a specific product. They may change, for example, some physical characteristics, or they have different attitudes towards customers’ service, even may proclaim some qualities of the product that may be real or imaginary ones.
Products may have diverse physical or qualitative aspects. Real difference in design, functions, resources used as a raw materials or quality of work provides vital aspects for product differentiation. For example, car producers try to differentiate their products by offering cars with different aspects of engine power, safe system, and design to attract more buyers.
Service and conditions that characterize selling of the products are some kind of product differentiation too. For example, some shops’ directors may stress more on providing some environment-friendly bags and have a higher price of goods, but others may offer the service of their clerks who will carry your products to your car for free. Prestige of the firm, appeal of the products, and helpfulness of the clerks are examples of product differentiation.
Goods may also be differentiated by their accessibility and location. For example, some mini-markets may compete with super-markets, even if their offer small amount of products and charge higher prices for goods, because their location is very convenient for buyers. So a lot of firms in monopolistically competition industry compete on the basis of location.
Product differentiation can be made by using brand names, trademarks, and celebrity ads. For example, a lot of producers are supplying sugar, but consumer’s choice may be influenced by superiority of some firms (who are known to have higher quality than others, even if it is real or not). For example, when a celebrity’s name is related with some clothing stuff or shoes, buyers may be willing to increase their demand for that product. Beautiful Packaging of some jewelry, natural water or gifts may attract additional costumers.
Even if there are a lot of firms in monopolistic competitive industries, they may have some control over price, because of price differentiation. If the consumers love the products of a specific seller, then they may pay higher prices to satisfy willingness to by that good. So, sellers and demanders aren’t connected randomly, like in a competitive market. So, monopolistic competitors may have some control over price, but it is quite limited, since there are a lot of substitutes for the goods they produce.
Entry and Exit
Entry and exit into monopolistically competitive industries is relatively easier than in pure monopoly and oligopoly. Because monopolistic competitors are typically very small, then economies of scale and capital resources are small enough for new firms to entry. But there may be some financial barriers when these firms will develop and advertise their products from rival’s. Some firms may possess even patents or copyrights, so the entry in this kind of industry will be quite difficult.
However, exit from this kind of market system is very easy. Nothing prevents an unprofitable firm to shut-down their activity.
The product’s differentiation policy would be inefficient if the firm won’t be able to tell consumers about them. That’s why monopolistic competitors sometimes advertise their products heavily. So the goal is “non-price” competition which means that prices are a small factor in buyers’ purchases.