Monopolistic competition

Industry structure combining elements of both monopoly and perfect competition. As in perfect competition, there are many sellers and entry and exit is relatively easy. However, unlike the situation in perfect competition, products are somewhat differentiated. As a consequence, each company faces a downward sloping demand curve which gives it some power over price. In this sense the company is like a monopolist, although the demand curve is more elastic than that of the monopolist. In essence, although the product is differentiated, it does have substitutes so that the demand curve facing the company will depend on the prices charged by rivals producing similar products. Because there are many companies and free entry/exit, monopolistic competition is not usually considered a problem for competition policy. In equilibrium, monopolistic competitors earn zero or low economic profits.