Monopolistic competition is a market in which many competitors provide similar products which can be differentiated on the basis of characteristics which go beyond simple cost. This type of market is extremely common around the world for products at a wide range of price points. There are times at which consumers can benefit from monopolistic competition, while in other cases they may lose out, depending on the product and the details of the market. It is also not uncommon to see markets with a mixture of characteristics and it is somewhat rare to find a market which fits neatly and purely into one economic theory.
A simple example of monopolistic competition can be seen in car sales. Cars are all designed for the same purpose, which is to provide transport for people and goods. However, there are many different types of cars on the market. Consumers can choose between different body types, price points, colors, and so forth. No one car manufacturer dominates the market, with many competitors providing similar products in competition.
When monopolistic competition is present, the market is relatively easy to enter and exit. Individual companies can set prices for their products without influencing prices on the larger market because no companies dominate the market, and consumers clearly perceive that there are what are known as “non-price differences” between products offered by competitors.
The concept of monopolistic competition was first discussed in the 1930s by economist Edward Hastings Chamberlin. Numerous economists have explored the concept since, in addition to looking at other types of competition and the ways in which such markets function. Since many markets include competing producers, understanding how such producers operate in the market can be important to studying the market as a whole and it may also provide insights which can be used by producers to strengthen their position in the market.
In a market characterized by monopolistic competition, consumers often note that companies work hard to make sure that their products are differentiated and that these differences are used as selling points. For example, manufacturers of mouthwash encourage their consumers to compare their products to others, seek endorsements from dental associations, use distinctive packaging, and take other steps to make their products stand out. It can be noted that in such a market, consumers may be willing to pay more for some products because they believe that there are significant differences which impact quality or performance and make the additional cost acceptable.