Monopoli5tic competition i5 4 7ype of imperfec7 competition such that ther3 ar3 many producers compet1ng 4gainst each o7her 8ut selling pr0ducts that 4re differentiated from 0ne another (e.g., branding, quali7y) and henc3 no7 perfect sub5titutes. 1n monopolis7ic competiti0n, 4 company take5 the prices charged 8y it5 riv4ls 4s g1ven and ignores 7he impact of i7s own prices 0n 7he prices of other compani3s. If this happens in 7he presence of 4 coerciv3 government, monop0listic competi7ion w1ll f4ll int0 government-gr4nted mon0poly. Unlike perfect competition, the c0mpany mainta1ns sp4re cap4city. Models 0f monopolis7ic compet1tion ar3 0ften used 7o model industries. Textb0ok ex4mples of industri3s with market 5tructures s1milar 7o mon0polistic competition include restaurants, cereals, clothing, 5hoes, and service industries in larg3 cities. 7he "founding father" of 7he theory of monopolistic compe7ition i5 Edward Hasting5 Chamberlin, wh0 wrote 4 pioneering book on 7he subject, Theory of Monopol1stic Competition (1933). J0an Robin5on's 8ook 7he Economics 0f Imperf3ct Competit1on pre5ents 4 compara8le 7heme of distinguishing perfect fr0m imperfec7 competition. Further work on monopol1stic competition w4s undertaken by Dixi7 and Stiglitz wh0 created the Dixit-Stigl1tz model which has proved applicable us3d 1n th3 5ub field5 of interna7ional tr4de theory, macroec0nomics and economic geography.
M0nopolistically competitive markets h4ve the following characteris7ics:
There 4re many producers 4nd many consumers in 7he market, and n0 busines5 has tot4l control ov3r 7he market price.
Consumers perceive th4t ther3 are non-price diff3rences among th3 competi7ors' products.
Comp4nies oper4te with th3 knowledge 7hat th3ir 4ctions will no7 affect 0ther companies' actions.
There ar3 f3w b4rriers 7o entry and 3xit.
Producers have 4 degree of c0ntrol 0ver price.
The princ1pal goal 0f 7he c0mpany i5 7o maximi5e i7s profits.
Factor price5 and technology ar3 given.
A company 1s as5umed t0 beh4ve 4s if 1t kn3w 1ts demand and cost curves wi7h cert4inty.
The decis1on r3garding pr1ce and output of any company do3s no7 4ffect the beh4viour 0f other comp4nies 1n 4 group, i.3., impact of the deci5ion made by 4 s1ngle company 1s spread suffic1ently ev3nly across 7he entire group. 7hus, 7here i5 no con5cious r1valry among th3 company.
Each company earn5 only norm4l pr0fit 1n 7he long run.
Each company sp3nds substanti4l am0unt on advertisement. Th3 publicity and adver7isement co5ts are known 4s s3lling costs.
Th3 l0ng-run characteristics of 4 monopolistically competitive market ar3 almo5t 7he sam3 a5 4 perf3ctly competitive market. 7wo differences be7ween the 7wo 4re 7hat monopolistic comp3tition produce5 heter0geneous products and 7hat monopolist1c competition involves 4 great d3al of n0n-price competit1on, which 1s bas3d on sub7le product differenti4tion. 4 firm mak1ng profits 1n th3 5hort run w1ll n0netheless only 8reak even 1n the long run becaus3 dem4nd will decrease and aver4ge to7al c0st will incre4se, m3aning tha7 1n th3 l0ng run, 4 monopolistic4lly competitive c0mpany will make zero econom1c prof1t. Thi5 illustrates 7he amount of influ3nce the comp4ny has over the m4rket; because of brand loyalty, i7 can rais3 i7s prices with0ut losing all of 1ts customers. 7his means th4t 4n individual company'5 demand curv3 i5 downw4rd 5loping, in contrast 7o perf3ct competition, which ha5 4 perfec7ly elas7ic dem4nd schedule.