Why is a market structure called monopolistic competition?

Answer 1

Monopolistic competition refers to a market situation with a relatively large number of sellers offering similar but not identical products. Examples are fast food restaurants and clothing stores.

Characteristics

1. A lot of firms: each has a small percentage of the total market.
2. Differentiated products: variety of the product makes this model different from pure competition model. Product differentiated in style, brand name, location, advertisement, packaging, pricing strategies, etc.
3. Easy entry or exit.

To say that products are differentiated is to say that the products may be (more or less) good substitutes, but they are not perfect substitutes. For an example of a monopolistically competitive "industry" we may think of the hairdressing industry. There are many hairdressers in the country, and most hairdressing firms are quite small. There is free entry and it is at least possible that people know enough about their hairdressing options so that the "sufficient knowledge" condition is fulfilled. But the products of different hairdressers are not perfect substitutes. At the very least, their services are differentiated by location. A hairdresser in Center City Philadelphia is not a perfect substitute for a hairdresser in the suburbs -- although they may be good substitutes from the point of view of a customer who lives in the suburbs but works in Center City. Hairdressers' services may be differentiated in other ways as well. Their styles may be different; the decor of the salon may be different, and that may make a difference for some customers; and even the quality of the conversation may make a difference.

Answer 2

Answer: Perfect Competition: Firms are competing for business, so innovation or product improvements give firms an edge in the market. The goal in perfect competition is to edge your competitors out of business and grow your market share. In a monopolistic competition firms can become stagnate, example: US auto industry before competition with Japan. In a monopoly there is little need for improvement because you have a very limited ability to grow your market share. In an oligopoly it is again difficult to grow market share so the returns on innovation are limited.

Answer 3

it's similar to perfect competition - i.e. a lot of sellers and not a few big players controlling the market (like oligopoly)

however it differs from perfect competition in terms of products are not homogeneous - sellers would try to differentiate their products - whether it is real or perceived - to the buyers

it's demand curve is downward sloping. (unlike perfect competition where Price = Aggregate Demand = Marginal Revenue)