The characteristics of monopoly and perfect competition. Both of these market structures are required to study for developing basic concepts and insights on market, but these are rarely, if at all, encountered in practice. In reality, we frequently encounter with a different type of market structure, known as monopolistic competition.
Monopolistic competition is a hybrid of monopoly and perfect competition. Some of the features of this market structure are similar to perfect competition, while the others resemble monopoly.
Examples of monopolistic competition are petrol pumps, chemist shops, beauty parlours, etc.
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i) Large number of firms are present in the market. Each of the firms holds such an insignificantly small share of the entire market demand, that if one firm changes price or output, it will not create any impact on the other firms.
ii) There is no barrier to entry in or exit from the industry. Any firm willing to operate in this industry is free to do so. Similarly, any firm willing to go out of an industry can implement its decision without any delay and without experiencing any financial burden.
iii) In case of perfect competition, we observe that products are homogeneous. But in case of monopolistic competition, each manufacturer offers a slightly different product than the others. This difference may arise from different brand names, differences in colour, shape etc.
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As a result of this product differentiation, every firm is expected to have some brand loyal customers. This situation justifies negatively sloped (downward sloping) demand curve. Negatively sloped demand curve indicates that increase in price leads to decline in demand. The monopolists also face a negatively sloped demand curve.