Monopolistic Competition
Candlefocus EditorDue to the presence of multiple firms in the market, none of them has the market power to set the price of the product. This phenomenon gives rise to mutually interdependent pricing decisions among all the firms in the market. The presence of multiple firms and low barriers to entry and exit make the market very competitive, which ends up leading to aggressive pricing by the firms and lower prices for the consumers. Furthermore, due to the lack of market control, firms in the monopolistic competition market structure have to compete for customers by advertising their products, offering discounts, and providing better services.
Moreover, some of the products sold in a monopolistic competition market may appear to be homogeneous. However, due to the level of differentiation by non-price factors such as brand, quality, and services, the products are in fact differentiated from each other. Firms then use these factors as a competitive advantage to gain a larger market share.
In monopolistic competition, firms have a relatively small control over their market. Although they can engage in a variety of pricing strategies, the end result is usually an equal playing field. Since none of the firms in the market have the ability to control market price, firms in the market have to practice price differentiation and employ cost-cutting measures in order to survive.
Monopolistic competition is a form of competition which is prevalent in the economy today. With a low number of firms and low barrier to entry in the market, new firms can enter the industry very quickly. This puts a pressure on existing firms as they have to constantly evolve their product offering, marketing, and advertising in order to remain competitive. Nevertheless, monopolistic competition can still be an attractive area for entrepreneurs to practice their competing skills in the market.