Monopolistic competition sits between perfect competition and monopoly. Many sellers offer products that are similar but not identical. Think restaurants, clothing brands, or hair salons. Each seller has some pricing power because customers see the products as different.

Differentiation is the key. A burger joint distinguishes itself through taste, location, or branding. A clothing brand builds an identity. These differences give sellers a small monopoly on their specific niche. But competition remains. If prices get too high, customers switch to substitutes.

In the long run, profits tend to erode. New entrants see an opportunity and join the market. They steal customers. Existing firms lose some pricing power. The market settles into a state where firms earn normal profits, though some maintain an edge through strong branding or loyalty.

Key features

• Many buyers and sellers
• Differentiated products
• Some pricing power
• Free entry and exit
• Non-price competition