Characteristics of monopolistic competition:
1. Large number of sellers and numerous buyers:
- There are numerous sellers in Perfect Competition. In monopoly there is only one seller, while in monopolistic competition there are many sellers. This means that there are neither numerous sellers, nor there is only one seller, but there are many sellers.
- There are numerous buyers in monopolistic market and so they cannot individually influence the market. Also they cannot affect the price of the product.
2. Product differentiation:
- Product differentiation is a distinct characteristic of monopolistic competition. Product differentiation refers to the concept of differentiating a product from another product in terms of form, quality and nature. For example, two different models of bike but built on same basic structure.
- A producer may produce a product with minor differences in terms of form, fragrance, taste, shape, weight and quality. These minor differences lead to availability of various products under product differentiation in monopolistic competition market.
3. Free entry and exit of firms:
- In a monopolistic competition it is easy for new firms to enter into an existing firm or to leave the industry.
- When there is normal profit in the market, the free entry and exit of the firm decreases and stops.
- The firms are generally not attracted by the normal profit and so the firms do not enter in such markets. Similarly, the existing firms in the market do not exit as they do not suffer losses.
4. Selling cost:
Expense incurred to sell a product is called the selling cost of that product.
- Selling cost includes expense incurred on packing, making the product attractive, sales tax, trahsportation, showroom expenses, money spent for selling, prizes, gifts, advertisement cost, etc.
- In monopolistic markets, selling cost creates product difference in the market which then gives a particular identity to a product. For example, companies.manufacturing mobile phones, soaps, etc. try to create unique identity through selling costs.
- Selling cost is a distinguished characteristic of monopolistic market.
5. Competition other than price:
- In monopolistic market, there exists competition of price as well as competition other than price.
- The sellers of various firms keep the price fixed i.e. do not compete for price and then try to attract the consumers by advertisement and compete by modifying the qualify i.e. they compete on factors other than price.
6. Imperfect knowledge regarding the market:
- The buyers and sellers do not have complete knowledge related to the market. They are not aware of identical and substitute products.
- The price of identical or substitute products are either high or low which results in variation in price of substitute products.
- There are many firms in monopolistic competitive market that produce identical or substitute products. These firms compete by creating a new identity of the product and this way try to establish monopoly like situation. This creates a monopolistic competition.
