Monopolistic competition

Somewhere between perfect competition and monopoly, also known as imperfect competition. It describes many real-world markets. Perfectly competitive markets are extremely rare, and few firms enjoy a pure monopoly; oligopoly is more common. In monopolistic competition, there are fewer firms than in a perfectly competitive market and each can differentiate its products from the rest somewhat, perhaps by advertising or through small differences in design. These small differences form barriers to entry. As a result, firms can earn some excess profits, although not as much as a pure monopoly, without a new entrant being able to reduce prices through competition. Prices are higher and output lower than under perfect competition.

The characteristics of Monopolistic market in detail:

1. Large number of sellers: Number is so large that there is no mutual interdependence –each farm acts independently
2. Large numbers of buyers: Large number of buyers are offered differentiated products
3. Differentiated products: Differentiation for creating preference of buyer. Differentiation may be real (physical) by differences in materials used, design, colour etc or fancied (imaginary) by packaging, advertising, use of trademarks and brand names. May be created by location of shop, courteous and smiling disposition of salesman, or reputation for fair dealing etc
4. Unrestricted entry: Entry in industry unrestricted
5.  Selling cost: Every firm tries to promote its own brand of product through advertisement to attract consumer. This cost may also changes price
6.  Price policy of a firm: Firm has its own price policy (can fix price)
7.  Imperfect knowledge: Due to imperfect knowledge consumers may feel certain product superior which is advertised
8.  Non-price competition: Firm can compete with its competitor by some methods rather than price –guarantee of repair, after sales service, gift scheme, and free home delivery.