A monopolistic competition is defined as that market structure in which each seller produces a ‘differentiated product’. The concept of product differentiation means that the product marketed by one seller can be distinguished from the products marketed by other sellers in some form or other. Some of the important methods of product differentiation include trade marks, brand names, size, packing, or colour etc. of the item, and technical specifications, etc.
Thus, in this market structure, each seller is a monopolist of his differentiated product. The buyers can get it only from him and from none else. At the same time, however, the products offered by different sellers are close substitutes of each other. The buyers are always comparing the prices of their products together with the perceived ‘quality’ of each. In other words, there is also an intense competition between suppliers for a share in the market. For this reason, it is a market structure in which there is a competition between a group of firms while each firm is a monopolist of its own product. It is, therefore, termed as monopolistic competition.
However, defining a monopolistic competition in this manner, though very realistic, poses certain problems of its own.
— Since the products supplied by the competing firms are not homogeneous, therefore, we cannot define the concept of a ‘market demand for the product’
precisely, that is, it is not possible to determine the average revenue curve of the ‘industry’ as a whole.
— Not only that, it is very difficult to even define an industry in a precise manner for the reason that its constituent firms are not supplying the same product.
At the most, we may think of a ‘group’ of firms selling close substitutes of each other.
— It is. not possible to have a satisfactory definition of even a ‘group’. This is because the ‘product group’ (such as scooters, or motor cycles) under consideration is itself in competition with other ‘product groups’.