Steve Bain

What is Monopolistic Competition in Economics?

In economics, the term Monopolistic Competition refers to a market structure in which firms compete with each other with differentiated products. In other words, rather than producing an identical product such as corn, each firm produces a variation of a product which they usually promote under a brand name.

The automobile industry is a good example of an industry with a monopolistic competition market structure, because each car manufacturer produces cars that are unique i.e., differentiated.

The inclusion of the word monopolistic in this term can cause some false impressions at first glance, because it does conjure ideas of excessive market power and profits. However, these industries are often fiercely competitive, and many firms have little real market power to raise prices too far. Nor are excessive profits common, with many of the firms in these industries operating on very tight margins.