namdaemun, market, myeongdong @ Pixabay

Monopolistic competition is a market structure that features many firms that are all selling differentiated products. Unlike monopolies, in this market, there are product substitutes and firms compete on price but not on quality.

Monopolistically competitive firms will produce where marginal revenue equals marginal cost, or in other words, they will produce at the point of tangency between their demand curve and their average total cost curve.

table, office, meeting @ Pixabay

An example of a monopolistically competitive firm would be Coca-Cola who produces many types of drinks with the same brand. Differentiated products in this market exist because firms are selling different things, but they have very similar prices and so it is difficult to tell which one is better than another.

This type of competition makes it hard for firms to differentiate themselves from their competitors and get an advantage over them whereas if there were no substitutes then brands could really stand out on quality alone without worrying about the price too much. If we look at how the demand curve would affect what quantity will be produced by a firm operating under monopolistic competition when demand rises as more people want the product that company can produce more until marginal cost equals marginal revenue.


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