Assumptions of Monopolistic Competition

Monopolistic competition as the name implies, combines features from both perfect competition and monopoly.  It has the following features from perfect competition.

i. There are many producers and consumers.  The producers produce differentiated substitutes.  Hence there is competition between them.  The difference from perfect competition is that the products area not homogeneous.

ii. There is freedom of entry into the industry so that an individual firm can make surplus profits in the short-run but will make normal profits in the long-run as new firms enter the industry.