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Monopolistic competition is a market form. Like with Perfect competition, there are many buyers and sellers. But the market is not perfect. This is because the products are not homogeneous, or because the buyers have explicit or implicit preferences.
This market form is quite common. As an example, take a bakery. There are many bakeries in the town, but one of those bakeries can demand a slightly higher price for bread, because it is the only one in a certain part of the town.
Monopolistically competitive firms are able to gain a greater degree of market share and as a result, increase prices. If a particular bakery is known for selling the best pies and pasties in town, they can increase their prices for pies and pasties as they know consumers will pay slightly more for a superior product. This is known as establishing a brand name and brand loyalty.
|Different Market forms|
|Perfect competition • Monopolistic competition • Oligopoly • Oligopsony • Monopoly • Natural monopoly • Monopsony|