Monopolistic competition is a market structure in which a large number of sellers offer products that are close but not perfect substitutes — differentiated goods — so each firm has some, limited, control over its own price.

Key features

• Large number of sellers and buyers, each acting independently; no single firm can control the whole market.
• Product differentiation — real or perceived — is the heart of the model (e.g. toothpaste, soap, restaurants).
• Free entry and exit in the long run.
• Selling costs / non-price competition: heavy use of advertising, branding and packaging to shift the firm's demand curve.
• Downward-sloping, highly elastic demand curve: the firm can raise price a little without losing all customers, but many close substitutes make demand quite elastic.

How and why it works

Differentiation gives each seller a mini-"monopoly" over its own brand, so it is a price-maker to a degree (unlike perfect competition where firms are price-takers). But since rivals sell close substitutes, demand is elastic and market power is weak — hence the name, blending "monopoly" and "competition."

Short run vs long run …