Essential features and causes of monopolistic competition are as follows:
Essential Features
1. Products are differentiated but close substitutes:
The products of different firms are differentiated and are commonly known by brand names or trademarks.
There may be difference of quality, packing and design. There will be competition between rival brands of each product. The consumers may come to acquire special preferences for particular brand.
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2. Monopolistic competition is characterized by imperfections in the market which may arise due to ignorance, inertia, cost of transport, irrational perferences of consumers and advertisement of dealers.
Consumers may be ignorant about the availability and the prices of the different brands in the market.
Similarly sellers too may not have equal knowledge about the market and the prices in the different sections of the market.
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3. A large number of sellers:
In a monopolistic competitive market, the number of sellers is large (but not as many as in perfect competition) and they are not dependent on rivals’ action. They act quite independently without caring for their rivals.
4. Competition:
As because each producer or seller is independent in his actions, but each one takes decisions, considering others’ actions and their effects on buyers’ behaviour.
This situation leads to competition among sellers. The producers or sellers never work in collusion with each other.
5. Free entry and exit:
Like perfect competitive situation there is perfect freedom for firms to enter or leave the industry at any time.
They will have to face a number of problems in entering the market under monopolistic conditions as compared to perfect competition.
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Thus, monopolistic competition is a market situation which substantially different from perfect competition or monopoly.
The existence of such a market in any commodity can be found out from the presence of certain practices, such as trade names and trademarks, advertisement by rival firm to promote their product, ability of firm to change in quality as well as prices, and so on.