Monopolistic competition refers to a situation where the product to be sold is differentiated and there are many sellers operating to sell it. The competition is not perfect and is between firms making similar products (not substitutes).

Characteristics

• There are many sellers and no seller is big enough to influence the market price.
• Each seller has an independent price-output policy.
• Product is heterogeneous due to differentiation. Product of each firm is a close substitute of the product of other firm.
• Patent rights, advertising, quality differentiation, etc. are used as the main instruments of product differentiation.
• There are no restrictions on the entry and exit of firms.
• Each individual firm enjoys some monopoly power due to product differentiation and hence, the demand curve is more elastic than that of the monopoly firm.