(a) The first feature of monopolistic competition, as mentioned above, is product differentiation. A buyer can get a specific type of the ‘product’ only from one final source (may be, through the dealers and sub-dealers, etc.).
(b) Product differentiation necessitates incurring of selling expenses on the part of firms under market structure of monopolistic competition.
(c) Monopolistic competition is characterised by a large number of sellers. The demand and supply conditions of these sellers are inter-dependent.However, in spite of their large number, no individual seller becomes a price taker. He has the authority to demand a price of his choice, though he also
considers the demand conditions for his product while exercising this authority. In other words, in spite of there being a large number of sellers, the demand curve for the product of an individual seller is downward sloping. Its demand is not perfectly elastic.
(d) The fact that each firm produces a ‘differentiated product’ implies that it can distinguish it further by varying its ‘quality’. An improvement in the ‘quality’ implies an increase in its average cost of production while a deterioration in quality implies a reduction in average cost of production. Also an improvement in quality is expected to ‘increase’ the demand for the product so that, for each given quantity, the buyers are ready to pay a higher price.
(e) The firms under the monopolistic competition face a competitive market as regards the inputs used by them. They also have to operate within a given technological range. The result is that no firm is able to compete out its rival by producing a ‘better quality’ product at a lower average cost.
(f) It is assumed that each firm has an accurate knowledge of its demand and cost conditions. This feature implies that the firm is able to estimate the impact of any change in the quantity and/or quality of its product on both its cost of production and average revenue. This knowledge, therefore, enables the firm to maximise its expected profit income.
(g) Every existing firm can leave the ‘group’ of firms belonging to the ‘product group’ (sometimes inaccurately called the industry). Similarly, new firms can enter the group and produce close substitutes of the existing products in the group. This free entry and exit of firms ensures that, in the long run, no firm incurs a loss and no firm is able to earn abnormal profit.