Monopolistic competition is a market structure that, because it is inefficient, is an example of an imperfect market. It is sometimes confused with oligopoly but in many ways it is more similar to perfect competition. The word ‘monopolistic’ gives the impression of a big firm with market power and yet firms in a monopolistically competitive market have relatively little market power. What is the theoretical basis of this market structure? What relevance does it have in a modern economy and are there any implications for public policy?
Edward Chamberlin wrote arguably the definitive book on this market, The theory of monopolistic competition, in 1933 and further work on the subject was written by the famous economist, Joan Robinson. In monopolistic competition there are many producers and consumers, with the market composed of a large number of small firms. These firms produce a differentiated product or service, with the opportunity for them to build brand loyalty among their customers. Non-price competition is commonplace and the product differentiation is supported by advertising. However, the products are not dissimilar and they can be seen as close but imperfect substitutes with positive cross price elasticity relationships.
Your organisation does not have access to this article.
Sign up today to give your students the edge they need to achieve their best grades with subject expertise
Subscribe
