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 Form 3 Business Studies lessons on product markets

Meaning and features of monopolistic competition market

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Answer Text:
Monopolistic competition.
- Monopolistic competition is a market setting where there are many firms which produce differentiated products.
- Monopolistic competition is a middle ground between monopoly, on the one hand and perfect competition (a purely theoretical state), on the
other and combines elements of each.
Features of monopolistic competition.
(i) Many buyers and sellers – The sellers and buyers of similar products are many and operate independently.
(ii) Differentiated products – The sellers
offer products which are close substitutes but vary in quality, branding and even in way of advertising them.
(iii) Actions of one firm attracts other firms – Any activity done by one firm such as advertising will attract the attention
of other firms in the industry.
(iv) Firms set similar prices – Firms set their own prices depending on the costs incurred by each in the production process and these prices eventually are the same.
(v) There is free entry and exit – New firms can join the existing industry easily while the existing firms can leave the market without restriction.
(vi) Factors of production are not controlled – No firm has control over the factors of production. The factors of production are acquired by each firm at the prevailing market prices.
(vii) There is perfect knowledge in the market – The buyers know the various products offered and their corresponding prices.
- Similarly, the firms are aware of each other as a competitor for the same customers.