Monopolistic competition is where there are many sellers and there is product differentiation: allowing the firms to dictate prices for their products marketed by quality or brand. However, demand is very elastic meaning consumers will easily switch from one competitor to another when prices change. (Investopedia)
Some companies may pivot to higher prices and lower sales if they want their brand to be associated with quality and/or luxury.
Example
Per Investopedia (2025), an example of Monopolistic Competition includes Burger King and McDonald’s whose customer base decides between the two based on product differentiation (brand recognition, price, different offerings) among other factors.
Pros of Monopolistic Competition (Investopedia)
- there are fewer barriers to entry
- there’s variety of choices for consumers
- company’s have decisions over their prices, perhaps allowing for more profit and thus more innovation.
- sometimes higher quality products for consumers
Cons of Monopolistic Competition (Investopedia)
- too many choices for consumers
- deceptive marketing leading to imperfect information for consumers
- consumers demand for the goods is very elastic
Perfect Competition vs Monopolistic Competition
In Perfect Competition, the goods being sold are the same and supply and demand dictates market prices, compared to Monopolistic Competition where the goods have differentiation, and each firm dictates their own prices.
Works Cited
Investopedia. “Monopolistic Competition: Definition, How It Works, Pros and Cons.” Investopedia, 5 Apr. 2025, www.investopedia.com/terms/m/monopolisticmarket.asp.
