It is important to understand the important characteristics of monopolistic competition. The knowledge of these features will enable the students to know how this form of market structure is different from perfect competition and oligopoly.
1. A large number of firms: the first important feature of monopolistic competition is that under it large area relatively large numbers of firms each satisfying small share of the market demand for the competition between them. Unlike perfect competition these large number of firms do not produce identical products. Instead they produce and sell differentiated products which are close substitutes of each other. This makes the competition among firms real and tough.
2. Product differentiation: the second important feature of monopolistic competition is that the products produced by various firms are not identical but slightly different from each other. Through different firms make their products of various firms working under monopolistic competition are not the same but are similar. Therefore, their pries cannot be very much different from each other. It is because of the fact that their products are similar and close substitutes of each other that the various firms under monopolistic competition compete with each other.
3. Some influence over the price: Each firm under monopolistic competition produces a product variety which is clo0se substitutes of others. Therefore, if a firm lowers the price of its product variety, some customers of other products varieties will switch over to it. This means as it lowers the price of its product variety; quantity demanded of it will increase. On the other hand, if it raises the price of its product, some of its customers will leave it and buy the similar products from its competing firms. This implies that demand curve facing a firm working under monopolistic competition slopes downward and marginal revenue curve lies below it. This means that under monopolistic competition an individual firm is not a price under but will take some influence over the price of its product. If it fixes a lower price, it will be able to sell more. Thus under monopolistic competition, a firm has to choose a price output combination which will maximise its profits.
4. Non price competition: an important feature of monopolistic competition is that firms incur considerable expenditures on advertisements and other selling costs to promote the sales of their products. Promoting sales of their products. Promoting sales of their products through advertisement is an important example of non pricing competition. The expenditure incurred on advertisement is prominent among the various types of selling costs. Like the adjustments of price and product, a seller under monopolistic competition will also adjust the amount of his outlay is unique to monopolistic competition, because the firm under perfect competition has not to incur any advertisement expenditure. The rival firms under monopolistic competition keenly compete with any advertisement by which they change the consumer’s wants for their products and attract more customers.
5. Product variation: another form of non price competition which a firm under monopolistic competition has to face is the variation in products by various firms. A firm, under perfect competition, dos not confront this problem, for the product is homogeneous under perfect competition.