Monopolistic Competition Definition

Written by True Tamplin, BSc, CEPF®

Reviewed by Editorial Team

Updated on March 10, 2023

Monopolistic competition describes an industry in which many firms are offering products that are similar, but not perfect substitutes.

In this type of industry, decisions of one firm will not directly affect their competitors, so it is said that firms have a low degree of market power.

Because products are broadly similar to one another, firms need to distinguish their product through heavy marketing.

This marketing focuses on product differentiation from similar products, which potentially comes by way of a discounted price or improved product branding, for example.

Barrier to entry in a monopolistic competition is low, which creates an incentive for new firms to enter the market and increase competition.

Because there is a range of similar products, demand is said to be in a monopolistic competition, that is, very sensitive to price changes.

A good example of this is with a consumer staple item such as cleaning products.

If the price of a specific brand of surface cleaner rises by 15%, there is a good chance the consumer will switch to a different and less expensive brand, or an alternative soap or disinfectant, with little hesitation.

In the short run, economic profit is positive in this industry, but approaches zero in the long run.

Economic profit is defined as the difference between the revenue from a sale and all of the costs used to create that product and sale, as well as any opportunity costs.

Monopolistic Competition FAQs

About the Author

True Tamplin, BSc, CEPF®

True Tamplin is a published author, public speaker, CEO of UpDigital, and founder of Finance Strategists.

True is a Certified Educator in Personal Finance (CEPF®), author of The Handy Financial Ratios Guide, a member of the Society for Advancing Business Editing and Writing, contributes to his financial education site, Finance Strategists, and has spoken to various financial communities such as the CFA Institute, as well as university students like his Alma mater, Biola University, where he received a bachelor of science in business and data analytics.

To learn more about True, visit his personal website, view his author profile on Amazon, or check out his speaker profile on the CFA Institute website.

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