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Monopolistic Existence of large number of firms

In Monopolistic competition, the number of firms producing a product will be large, but the size of each firm will be small. Each firm follows an independent price-output policy. No firm’s action influences the other in any significant manner.

Product differentiation

In monopolistic competition, by adopting different techniques one firm will be trying to show that its products are different from other firm. Those different techniques may be in the form of: (a) differences in the quality of raw materials used (b) offering supplementary and other services to customers like offering gifts, free home delivery, after sales services etc.

Free entry and exit of firms

New firms will have complete freedom to enter into an industry or to leave the industry. There will be no entry barriers and in the same no restriction on coming out of the industry like in the perfect competition.

It is a combination of monopoly and competition

Monopolistic competition is a peculiar combination of both monopoly and competition. Large number of small sellers producing differentiated products which are close substitutes but cann’t be perfect substitutes. A small group of monopolists are in competition to sell their goods.

Selling costs

All those expenses, which are incurred on sales promotion of a product are called as selling costs. These selling costs includes cost on advertisements, free gifts, decoration of shop, demonstrations etc. All these costs are necessary for the sales promotion because many sellers are selling products which are close substitutes. So to induce buyers to buy their products selling costs are necessary.

Definite preference of the consumers

The consumers will have definite preference for a particular product, due to its special features. But sometimes the demand curve in the monopolistic competition will be more elastic. It implies that a small increase in prices the demand may be reduced drastically. Hence, in monopolistic competition, the sellers complete with each other through product differentiation or selling, but not with price.

Two dimensional

Here the firms are of either price competitive or non price competitive i.e brand or quality etc..

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