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In this video, they explain how each store have similar products, but are their own individuals. They may carry different prices and decisions, but none of these will effect their competitors. Competition will continue to grow until some of the competitions economic profits are zero.

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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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• The market has many sellers.
(EX) The competition is endless. There will always be the big competitions such as
Dominos, Pizza Hut, and little caesars; however, there will also be small local                             businesses in the competition that may steal some business, such as '$5 pizza.'
• The seller has to spend quite a bit on advertising.
(EX) Because there are so many companies selling similar products, one must make                       theirs stick out by advertising. In 2014, Pizza hut spent $233 million dollars on                         advertisements while Dominos pizza spent $105 million dollars.
• Manufacturers can affect the price.
• Lack of innovation.
(EX) Pizza hut has decided to keep the interior designs the same in all of their huts;                         however, when they tried to get innovative by doubling the options on their menu,                    many tended to buy their usual orders anyway.

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• The market has many buyers
• The seller is the price maker
(EX) Little Caesars keeps their prices as low as $5. Although their profit per pizza
won't be as great as Domino's pizzas, they make up for it by grasping many
customers with their always low prices. This is why they are in the top three.
• Customers may gain knowledge about a product through other competitors
(EX) Because pizza has been around with places such as pizza hut, when little                                   caesars began they didn't have to try and sell people a brand new product, they
were able to hop onto the already famous business.
• Limited competition
• Free entry or exit from the market
(EX) Because no one owns "the pizza," many companies are able to hop right into the
competition with no problem. The product won't be brand new. Because of this,
pizza places such as "Punch" are able to create their own and build their way to                         the top also.

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Little Caesars is in the pizza business competition. As commonly known, there are thousands of pizza places around the United states that sell similar pizzas (similar topping choices, similar shapes, etc) but with small differences. Some go down the route of adding to their pizza with more toppings, more features like stuffed crusted pizzas; however, Little Caesars decided to instead lower their prices down to five dollars.

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Monopolistic competition is when many different firms sell similar or unique products.