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Important features of monopolistic competition

1. Existence of large number of firms:


The first important feature of monopolistic competition is that there is a large number of firms satisfying
the market demand for the product. As there are a large number of firms under monopolistic
competition, there exists stiff competition between them. These firms do not produce perfect
substitutes. But the products are close substitute for each other.
(2) Product differentiations:
The various firms under monopolistic competition bring out differentiated products which are relatively
close substitutes for each other. So their prices cannot be very much different from each other. Various
firms under monopolistic competitors compete with each other as the products are similar and close
substitutes of each other. Differentiation of the product may be real or fancied.
Real or physical differentiation is done through differences in materials used, design, color etc. Further
differentiation of a particular product may be linked with the conditions of his sale, the location of his
shop, courteous behavior and fair dealing etc.
(3) Some influence over the price:
As the products are close substitutes of others any reduction of price of a commodity by a seller will
attract some customers of other products. Thus with a fall in price quantity demanded increases. It
therefore, implies that the demand curve of a firm under monopolistic competition slopes downward
and marginal revenue curve lies below it.
Thus under monopolistic competition a firm cannot fix up price but has influence over price. A firm can
sell a smaller quantity by increasing price and can sell more by reducing price. Thus under monopolistic
competition a firm has to choose a price-output combination that will maximize price.
(4) Absence of firm's interdependence:
Under oligopoly, the firms are dependent upon each other and can't fix up price independently. But
under monopolistic competition the case is not so. Under monopolistic competition each firm acts more
or less independently. Each firm formulates its own price-output policy upon its own demand cost.
(5) Non-price competition:
Firms under monopolistic competition incur a considerable expenditure on advertisement and selling
costs so as to win over customers. In order to promote sale firms follow definite -methods of competing
rivals other than price. Advertisement is a prominent example of non-price competition.
The advertisement and other selling costs by a firm change the demand for his product. The rival firms
compete with each other through advertisement by which they change the consumer's wants for their
products and attract more customers.
(6) Freedom of entry and exit:

In a monopolistic competition it is easy for new firms to enter into an existing firm or to leave the
industry. Lured by the profit of the existing firms new firms enter the industry which leads to the
expansion of output. But there exists a difference.
Under perfect competition the new firms produce identical products, but under monopolistic
competition, the new firms produce only new brands of product with certain product variation. In such a
law the initial product faces competition from the existing well- established brands of product.