Monopolistic competition

Monopolistic competition is a MARKET STRUCTURE in which there are many producers of differentiated products and ease of entry into the market. Monopolistic competition is similar to PERFECT COMPETITION, but with each firm selling slightly different PRODUCTs or SERVICES. In the United States, many retail clothing, food, sporting goods, and lodging markets are characterized by monopolistic competition. The essential feature of monopolistic competition is product differentiation. Producers attempt to create real or perceived positive differences in their products compared to competitors’ offerings. Businesses use brand images, PACKAGING, product variations, and considerable ADVERTISING and SALES PROMOTION to convince consumers that their product is superior and therefore worth a higher price. The goal in monopolistic competition is to sufficiently differentiate the firm’s products so that consumers will not substitute competitors’ products when the firm’s products are priced higher. Businesses try to develop CUSTOMER LOYALTY in a market that offers many choices for consumers. Economists describe this effort as attempting to reduce the ELASTICITY OF DEMAND for the firm’s products. Often in monopolistically competitive markets, individual firms can earn substantial economic PROFITs for a short period of time, but with ease of entry, competitors seeing a firm making profits will enter the market, taking away part of the market DEMAND and reducing the first firm’s profits. The clothing industry is a good example of monopolistic competition. One firm will introduce a new product, style, or color; just having a celebrity endorse something creates demand for the product. When it becomes a hit, competitors will quickly enter the market with very similar products. Toys are another monopolistically competitive market. When a new stuffed animal or electronic game becomes popular, competitors will rapidly create almost exact copies of the hit item. Because there are many competing firms and it is easy for firms to enter the market, monopolistically competitive firms will earn economic profits only in the short run.