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A video clearly

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What is 'Monopolistic Competition'

Characterizes an industry in which many firms offer products or services that are similar, but not perfect substitutes. Barriers to entry and exit in the industry are low, and the decisions of any one firm do not directly affect those of its competitors. All firms have the same, relatively low degree of market power; they are all price makers. In the long run, demand is highly elastic, meaning that it is sensitive to price changes. In the short run, economic profit is positive, but it approaches zero in the long run. Firms in monopolistic competition tend to advertise heavily.

BREAKING DOWN 'Monopolistic Competition'

Monopolistic competition is a middle ground between monopoly, on the one hand, and perfect competition (a purely theoretical state), on the other, and combines elements of each. It is a form of competition that characterizes a number of industries that are familiar to consumers in their day-to-day lives. Examples include restaurants, hair salons, clothing and consumer electronics. To illustrate the characteristics of monopolistic competition, we'll use the example of household cleaning products.

Number of firms

Say you've just moved into a new house and want to stock up on cleaning supplies. Go to the appropriate aisle in a grocery store, and you'll see that any given item-dish soap, hand soap, laundry detergent, surface disinfectant, toilet bowl cleaner, etc.-is available in a number of varieties. For each purchase you need to make, perhaps five or six firms will be competing for your business.

Product Differentiation

Because the products all serve the same purpose, there are relatively few options for sellers to differentiate their offerings from other firms'. There might be "discount" varieties that are of lower quality, but it is difficult to tell whether the higher-priced options are in fact any better. This uncertainty results from imperfect information: the average consumer does not know the precise differences between the various products, or what the fair price for any of them is.

Monopolistic competition tends to lead to heavy marketing, because different firms need to distinguish broadly similar products. One company might opt to lower the price of their cleaning product, sacrificing a higher profit margin in exchange-ideally-for higher sales. Another might take the opposite route, raising the price and using packaging that suggests quality and sophistication. A third might sell itself as more eco-friendly, using "green" imagery and displaying a stamp of approval from an environmental watchdog (which the other brands likely qualify for as well, but don't display). In reality, every one of the brands might be equally effective.

Decision-Making

Monopolistic competition implies that there are enough firms in the industry that one firm's decision does not set off a chain reaction. In an oligopoly, a price cut by one firm can set off a price war, but this is not the case for monopolistic competition.

Pricing Power

As in a monopoly, firms in monopolistic competition are price setters, rather than price takers.

Demand Elasticity

Due to the range of similar offerings, demand is highly elastic in monopolistic competition. In other words, demand is very responsive to price changes. If your favorite multipurpose surface cleaner suddenly costs 20% more, you probably won't hesitate to switch to an alternative, and you're countertops probably won't know the difference.

Economic Profit

In the short run, firms can make excess economic profits. However, because barriers to entry are low, other firms have an incentive to enter the market, increasing the competition, until overall economic profit is zero. Note that economic profits are not the same as accounting profits; a firm that posts a positive net income can have zero economic profit, since the latter incorporates opportunity costs.

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Characterizes an industry in which many firms market products that are similar, but not perfect substitutes. Barriers to entry and exit in the industry are low, and the decisions of any one firm do not affect those of the others. All firms have the same, relatively low degree of market power; they are all price setters.

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- Dues to the differentiated products companies may raise their price more than the regular price.
(Wendy's prices on their menu is higher than McDonald's menu )
-Companies try to differentiate products from others by adding new feature without concentrate on the basic product. (Burger King add new product but they don't improve the quality of their regular menu items.
-Companies spend too much money on commercial in which the expanse increases the price of products.
(people want to raise the minimum wage but it will increase the price for product)

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- Buyer have many options due to the differentiated product as every product have a unique feature. ( McDonald's french fries and Big Mac)
-Sellers advertise a product in which buyers determine to purchase the product by the way it was shown. (The quality of a Dave's Burger (Wendy's) on television.
-The company adds a new feature to a product or a way for customers to buy their products. (McDonald's Mcpick 2 for $5)

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McDonald's is the top fast food chain in the world. They have about more than 36,000 locations around the world with many types food. Most Mcdonald's restaurants is own by local business men and women. Mcdonald serves a menu with a variety of quality food. For example, crispiest french fries, many types of burgers , coffee drinks (Mc cafe), chicken sandwiches, chicken nuggets and etc.

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Monopolistic competition has many sellers and buyers.Businesses sell similar or unique products. a
Products can be a substitute for another but it won't be the same. There is no entry and exit cost. It includes an independent decision on price and output, its products, its market , and its cost of production. sellers use advertising to differentiate their products.