What characterizes ‘monopolistic competition’?

Monopolistic competition is characterized by a market structure where many sellers offer differentiated products. This means that while there are several competitors in the market, each one provides products that are similar but not identical, allowing them to stand out in various ways, such as through branding, quality, or additional features. As a result of this differentiation, firms have some degree of market power, enabling them to set prices at a level that can be above marginal cost, unlike in perfect competition where products are identical.

The presence of numerous sellers is also vital, as it fosters competition, but the differentiation means that firms can have some influence over their prices rather than being price takers. This framework allows for a nuanced understanding of consumer preferences and competitive strategies, making it distinct from pure competition or monopoly markets where the scenarios are much simpler.