The Theory of Monopolistic Competition

The theory of monopolistic competition describes a market structure where many firms sell similar but slightly differentiated products, like clothing brands or restaurants. Each business has some power to set prices because their offerings are unique in small ways—such as style, quality, or service. While competition exists, product differentiation allows companies to attract specific customers. Entry and exit are relatively easy, so profits tend to attract new firms, which eventually reduces individual profits. This balance creates a dynamic where firms compete on both price and product features, leading to a diverse marketplace with many options for consumers.