• A market in which many firms produce similar goods or services but each maintains some independent control of its own price.

• A distinguishing structural characteristic of monopolistic competition is that there are “many” firms in the industry.  “Many” is somewhere between the “few” of oligopolies or the “hordes” that characterize perfect competition.
• Low Concentration
• Low concentration ratios are common in monopolistic competition.
• Examples of monopolistic competition include banks, radio stations, health spas, apparel stores, and convenience stores.
• Market Power.
• Each producer in monopolistic competition is large enough to have some market power.
• A monopolistically competitive firm confronts a downward-sloping demand curve.
• Independent Production Decisions.
• Modest changes in the output or price of any single firm will have no perceptible influence on the sales of any other firm.
• The relative independence of monopolist competitors means that they don’t have to worry about retaliatory responses to every price or output change.
• Low Entry Barriers
• The presence of low barriers to entry.

A.  Product Differentiation.

• One of the most notable features of monopolistically competitive behavior is product differentiation - that is, features that make one product appear different from competing products in the same market.

B.  Brand Loyalty

• Each firm only has a monopoly on its brand image.  It still competes with other firms offering close substitutes.
• Brand loyalty makes the demand curve facing the firm less price-elastic.
• Brand loyalty implies that consumers shun substitute goods even when they are cheaper.
• Each monopolistically competitive firm will establish some consumer loyalty.

C.  Short-Run Price and Output

• The monopolistically competitive firm’s production decision is similar to that of a monopolist.
• As always, the profit-maximizing rate of output is desired  MR = MC.

D.  Entry and Exit

• With low barriers to entry, new firms will enter the market if there is economic profit.
• When firms enter a monopolistically competitive industry:
• the market supply curve shifts to the right. 
• the demand curves facing individual firms shift to the left.

E.  No Long-Run Profits

• In the long run, there are no economic profits in monopolistic competition.

F.  Inefficiency

• Monopolistic competition tends to be less efficient in the long run than a perfectly competitive industry.
• Excess Capacity - Because of the industry-wide excess capacity in monopolistic competition, each firm is producing at a rate of output that is less than its minimum-ATC output rate.  Thus, the same level of industry output could be produced at lower cost with fewer firms.
• Flawed Price Signals - Monopolistic competition results in both production inefficiency (above-minimum average cost) and allocative inefficiency (wrong mix of output).