Monopolistic Competition
Categories: Financial Theory, Econ
Monopolistic competition sounds like an oxymoron. How can you have a competitive market as well as a monopoly, which is the case when one firm dominates a market? A monopoly is about as non-competitive as a market can get.
Monopolistic competition is actually most markets we’re in today. It’s an economy where there exist many producers selling differentiated products—firms carving out a niche for themselves, creating mini-monopolies within a competitive market.
Take iPhones and Androids. These two goods are technically the same good...both “phones,” or tiny pocket-computers...but consumers don’t consider them substitutes. You don’t want an Android if the rest of your tech-life is constrained by having all-Apple products. Apple has created a niche market: differentiating its iPhone from other phones, creating a mini-monopoly within a competitive smartphone market.
Monopolistic competition is when differentiation of goods makes the goods imperfect substitutes, like...an Android is not a perfect substitute for an iPhone, and vice versa. If you think about it, firms are incentivized to do this, creating their own unique spin on a product to carve out their own space, gaining their own group of loyal customers to get all that cash-money without worrying as much about the competition.
Sure, it’s still a competitive market, but a monopolistically competitive one.