Monop­o­lis­tic com­pe­ti­tion is a mar­ket with many sell­ers whose prod­ucts are sim­i­lar but not iden­ti­cal. It is highly com­pet­i­tive, and prod­uct dif­fer­en­ti­a­tion is its main fea­ture: by mak­ing their prod­ucts seem dif­fer­ent, firms gain a lit­tle pric­ing power and can earn bet­ter mar­gins. That is why adver­tis­ing mat­ters so much here. Adver­tis­ing is how firms con­vince con­sumers that there is a real dif­fer­ence between prod­ucts in the same cat­e­gory, and the more suc­cess­fully a firm dif­fer­en­ti­ates its prod­uct, the more con­trol it has over its price.

Main char­ac­ter­is­tics of a monop­o­lis­tic mar­ket

  • There are many buy­ers and sell­ers.
  • Bar­ri­ers to entry are low, so firms can enter and leave the mar­ket eas­ily.
  • Each sell­er's prod­uct is a close, but not per­fect, sub­sti­tute for the prod­ucts of other sell­ers.
  • Firms com­pete through brand­ing, qual­ity, ser­vice and adver­tis­ing as well as price.

Exam­ple of a monop­o­lis­tic mar­ket

Restau­rants are a good exam­ple. Bar­ri­ers to entry are low, which is why every local­ity has so many of them. Each restau­rant tries to stand apart from the rest, for exam­ple by offer­ing many cuisines, by spe­cial­is­ing in one kind of food, or, like Domi­no's and McDon­ald's, through strong brands and adver­tis­ing.