This guide provides an overview of the concept of monopolistic competition and its role in the market. It explains the characteristics of this market structure, the different types of firms that participate in it, and the dynamics of the market. It also explores the implications of
Monopolistic competition is a type of imperfect competition such that there are many producers competing against each other but selling products that are differentiated from one another and hence not perfect substitutes. For monopolistic competition, a company takes the prices charged by its rivals as given and ignores the effect of its own prices on the prices of other companies. If this happens in the presence of a coercive government, monopolistic competition may evolve into government-granted monopoly. Unlike perfect competition, the company may maintain spare capacity. Models of monopolistic competition are often used to model industries. Textbook examples of industries with market structures similar to monopolistic competition include restaurants, cereals, clothing, shoes, and service industries in large cities. The earliest developer of the theory of monopolistic competition is Edward Hastings Chamberlin, who wrote a pioneering book on the subject, Theory of Monopolistic Competition (1933). Joan Robinson's book The Economics of Imperfect Competition presents a comparable theme of distinguishing perfect from imperfect competition. Further work on monopolistic competition was performed by Dixit and Stiglitz who created the Dixit-Stiglitz model which has proved applicable used in the subtopics of international trade theory, macroeconomics and economic geography.