Definition
Monopolistic Competition
Monopolistic competition is a market with many firms selling differentiated products, each with some pricing power from branding but facing easy entry that erodes long-run profits.
Monopolistic competition sits between perfect competition and monopoly. Many sellers offer similar but differentiated goods, restaurants, salons, branded apparel, FMCG, so each has limited pricing power through branding and quality.
Because entry is easy, excess profits attract new firms until profits normalise. This structure explains heavy advertising and product differentiation in India's consumer markets, where firms compete on brand, packaging and features rather than price alone.
Related terms
- Cross Elasticity of DemandCross elasticity of demand measures how the demand for one good changes when the price of another changes, identifying substitutes (positive) and complements (negative).
- MonopolyA monopoly is a market with a single seller and no close substitutes, giving that firm power to set prices above competitive levels and restrict output.
- OligopolyAn oligopoly is a market dominated by a few large firms whose decisions are interdependent, often leading to price rigidity, tacit coordination or fierce competition.
Plain-English explainer from The Dispatch Investors Encyclopedia. General information, not financial advice.