Theory of Monopolistic Competition

Monopolistic competition is a market structure where many firms sell similar but not identical products, such as clothing brands or restaurants. Each business has some control over its prices because customers may prefer one product over another based on quality, branding, or features. Because there are many competitors, no single firm can set prices too high without losing customers. Firms regularly compete through marketing, quality, and innovation to attract buyers. This environment encourages product differentiation and innovation, leading to a balance where firms can earn normal profits in the long run, while consumers benefit from a variety of choices.