Lesson preview · Monopolistic Competition
Many Firms, Differentiated Products
~5 min · Free to read
Walk down a city block. Five coffee shops, each with its own atmosphere, prices, and regulars. None is a monopoly — switch any time. None is a price-taker either — each one sets its own prices and keeps its own customers. That’s monopolistic competition.
It sits between perfect competition and monopoly. Many firms, free entry and exit (the competition side). But each firm’s product is slightly different from the rest (the monopoly side). The difference might be physical (a richer roast), or geographic (closer to the office), or just a name and a logo. Whatever it is, it gives the firm a small slice of pricing power.
Key Term
Five features
- Many firms — no single seller dominates.
- Differentiated products — each firm’s offer is slightly different (branding, quality, location).
- Free entry and exit — no significant barriers.
- Downward-sloping demand — each firm has its own demand curve, more elastic than a monopolist’s because close substitutes are next door.
- Some pricing power — firms set prices, but only within a narrow range.
Worked Example
Fifty pizza restaurants in a city, each with a different menu and atmosphere. One raises its price by 10 percent and loses 30 percent of its customers to rivals. What does the math tell us about the market?
Check yourself · no marks
Both monopolistic competition and perfect competition have many firms and free entry. What separates them?
Commit to one first. Guessing and being wrong beats reading the answer cold.
Practice · 1 / 4
Which of the following is NOT a characteristic of monopolistic competition?
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