Monopolistic Competition: Definition, Theory, Characteristics & Examples

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  • 0:02 Monopolisitic…
  • 1:27 Theory & Characteristics
  • 2:20 Examples
  • 3:11 Lesson Summary
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Lesson Transcript
Instructor: Katryn Stewart

Katryn has a Masters degree in Management, has been PHR certified, and has taught college business and human resource management courses.

A market economy relies on competition in order to be successful. There are multiple forms of competition. This lesson discusses monopolistic competition, which is competition based on product differentiation.

Monopolistic Competition Definition

Competition is essential in order to have a market economy, also called a 'free market,' or 'capitalism.' Think of it like this: in order to choose what you buy (which is essential to having a free market), you must have choices. Choices create competition. There are four forms of competition within a market economy.

A perfect competition exists when there are many small competitors carrying similar products, giving you plenty of options from which to choose. The opposite of this is a monopoly, in which there's only one option and, therefore, no choice for the consumer. The third form of competition, an oligopoly, exists when there are only a few, large competitors in the market. The fourth and final form of competition is called monopolistic competition.

A monopolistic competition exists when we've got multiple sellers who are attempting to seem different than their competitors, and it's this difference that makes you, the consumer, want to buy their specific t-shirt.

While everyone may be selling white t-shirts, in a monopolistic competition, each seller is attempting to achieve profits by convincing the consumer (you) that their white t-shirt is better than that which the other competitors are selling. They can do this in a number of ways. These can include arguing that their shirts are of a better quality, that they won't shrink, or that they have no tags. They might even argue their t-shirt's quality simply on the basis of their brand name.

Theory and Characteristics

While a monopolistic competition is similar to a perfect competition in that there are many smaller firms in the market, the defining characteristic of a business entering into monopolistic competition is this notion of product differentiation. While Wal-Mart may sell a perfectly decent white t-shirt, a brand name store such as Polo or Nike will differentiate their white t-shirts, not only on the basis of higher quality, but often simply because of the name or logo it carries.

Of course, along with product differentiation like this often comes a justification for higher pricing. While other forms of competition focus on control of the market or supply and demand within the market, a firm within a monopolistic competition focuses on standing out from everyone else in the market on the basis of how their product is better than, and different from, that of their competitors, and they can control their prices accordingly.

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