BREAKING DOWN ‘Monopolistic Competition’
Monopolistic competition is a middle ground between monopoly and perfect competition (a purely theoretical state), and combines elements of each. All firms in monopolistic competition 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.
Monopolistic competition 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.
