Monopolistic/Imperfect competition as the name signifies is a blend of monopoly and competition. It is a systematic and realistic theory of price analysis in this imperfectly competitive world. Monopolistic competition is a market situation in which there are relatively large number of small firms which produce or sell similar but not identical commodities to the customers.
According to Leftwitch:
"Monopolistic competition is a market situation in which there are many sellers of a particular product, but the product of each seller is in some way differentiated in the minds of consumers from the product of every other seller".
In the words of J.S. Bain:
"Monopolistic competition is found in the industry where there is a large number of small sellers selling differentiated but close substitute products".
Same is the case with many other firms in the market like plywood manufacturing, jewellery making, wood furniture, book stores, departmental stores, repair services of all kinds, professional services of doctors, technicians, etc., etc. These firms and others which have an element of monopoly power and also face competition over the sale of product or service in the market are called monopolistically competitive firms.
Characteristics of Monopolistic/Imperfect Competition:
The main characteristic or features of monopolistic competition are as under:
(i) A fairly large number of sellers: The number of firms in monopolistic competition is fairly large. Each firm produces or sells a close substitute for the product of other firms in the product group or industry. .Product differentiation is thus the hallmark of monopolistic competition.
(ii) Differentiation in products: Under monopolistic competition, the firms sell differentiated products. Product differentiation may be real or imaginary. Real differentiation is done through differences in the materials used, design, color etc. Imaginary differences may be created through advertisement, brand name, trade marks etc. The firms producing similar products in .this imperfectly competitive world cannot raise the price of product much higher than their rivals. If they do so, they will lose much of their sale, but not all the sale. In case, they lower the price, the total sale can be increased to a certain extent. How much will the sale increase or decrease by lowering or raising the price will depend upon the product differentiation of the different firms.
If the product of the various firms are very close substitutes of one another and no imaginary or real difference exists in the mind of the buyers, then a slight rise or fall in the price of the product of one firm will appreciably decrease or increase the demand for the product. If the product of one firm differs from that of other firm, (though the difference may be an imaginary one) a slight rise in the price of the product of one firm will not drive away all its customers. A few faithless buyers may be attracted by the low price of the other rival product but not all the buyers.
(iii) Advertisement and propaganda: Another very important characteristic of the monopolistic competition is that each firm tries to create difference in its product from the other by advertising, propaganda, attractive packing, nice smile, etc., etc. When it succeeds in its object, the firm occupies almost the position of a monopolist. It is, thus, in a position to raise-the price of the product without losing its customers.
(iv) Nature of demand curve: Since the existence of close substitutes limits the monopoly power, the demand curve faced by a monopolistically competitive firm is fairly elastic. The precise degree of elasticity will however, depend upon the number of firms in the group product or industry. If the number of firms is fairly large and the product of each firm is not very similar, the demand curve of a firm will be quite elastic. In case, there is close competition among the rival firms for the sale of similar products, the demand curve of a firm will be less elastic.
(v) Freedom of entry and exit of firms: The entry of new firms in the monopolistically competition industry is relatively easy. There are no barriers of the new firm to enter the product group or leave the industry in the long run.
(vi) Sales efforts: With heterogeneous products, the sale of the products by the firms can no longer be taken for granted sale depends upon sale efforts.(vii) Non-price competition: In monopolistic competition, the firms make every effort to win over the customers. Other than price cutting, the firms may offer after sale service, a gift scheme, discount not declared in the price list etc.
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