What Is Monopolistic Competition?

Monopolistic Competition Definition

Monopolistic competition describes an industry in which many firms are offering products that are similar, but not perfect substitutes.

In this type of industry, decisions of one firm will not directly affect their competitors, so it is said that firms have a low degree of market power.

Because products are broadly similar to one another, firms need to distinguish their product through heavy marketing.

This marketing focuses on product differentiation from similar products, which potentially comes by way of a discounted price or improved product branding, for example.

Barrier to entry in a monopolistic competition is low, which creates an incentive for new firms to enter the market and increase competition.

Because there is a range of similar products, demand is said to be ‘highly elastic’ in a monopolistic competition, that is, very sensitive to price changes.

A good example of this is with a consumer staple item such as cleaning products.

If the price of a specific brand of surface cleaner rises by 15%, there is a good chance the consumer will switch to a different and less expensive brand, or an alternative soap or disinfectant, with little hesitation.

In the short run, economic profit is positive in this industry, but approaches zero in the long run.

Economic profit is defined as the difference between the revenue from a sale and all of the costs used to create that product and sale, as well as any opportunity costs.

Monopolistic Competition FAQs

Monopolistic competition describes an industry that has similar products but not perfect substitutes for one another.
Because products are broadly similar to one another, firms need to distinguish their product through heavy marketing.
Monopolistic competition usually includes industries familiar to consumers in their daily lives such as clothing stores, restaurants, and convenience stores.
Successful marketing usually relies on product differentiation. This often comes by way of a discounted price or improved product branding, for example.
An example of highly elastic price goes like this. If the price of a specific brand of surface cleaner rises by 15%, there is a good chance the consumer will switch to a different and less expensive brand, or an alternative soap or disinfectant, with little hesitation. Brand loyalty is not strong.
True Tamplin, BSc, CEPF®

About the Author
True Tamplin, BSc, CEPF®

True Tamplin is a published author, public speaker, CEO of UpDigital, and founder of Finance Strategists.

True contributes to his own finance dictionary, Finance Strategists, and has spoken to various financial communities such as the CFA Institute, as well as university students like his Alma mater, Biola University, where he received a bachelor of science in business and data analytics.

To learn more about True, visit his personal website, view his author profile on Amazon, his interview on CBS, or check out his speaker profile on the CFA Institute website.