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Monopolistic competition exists in industries that have many firms offering similar products or services: for example, restaurants, supermarkets and clothing stores. In monopolistic competitions, those similar products and services are not perfect substitutes for one another. Each company in a monopolistic competition can set the price it wants to charge because its product has no perfect substitute. Because firms need to distinguish their products, monopolistic competition leads to heavy marketing. Firms might lower prices to spur higher sales, or raise prices to suggest superior quality.

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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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Advantages:
* Products are way better than opponents
* Prices are reasonable
*  Convenient hours

Disadvantages:
* They identical products as you, like everything is the same
* They always have a sale when you don't
* No one comes to your store cause of your price range
* The other company is closer to their homes and yours is farther away.

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They feature a great selection of high-quality merchandise, friendly service and of course everyday low prices. More than 1,000,000 products available online and in the innovative businesses that Walmart continues to develop, such as Music Downloads and 1-Hour Photos, which gives customers the convenience of ordering products online and picking them up at a local Walmart. We also have convenient hours (24 hours, 7 days a week)

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Characteristics of Monopolistic Competition 

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Characteristics of Monopolistic Competition 

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*  Product differentiation
*  Many Firms
* Freedom of entry and exit
* Independent decision making
* Same degree of making power
* Lack of perfect knowledge