Monopolistic competition

We are examining monopolistic competition, a market structure seen in sectors like restaurants, retail clothing, and services such as hairdressing and dry cleaning. Unlike perfect competition with identical products, monopolistic competition includes several firms selling slightly differentiated products. Entry and exit are largely costless, so new businesses can join or leave the market easily, creating a dynamic, evolving environment. Despite many rivals, each firm is not a price-taker but a price-searcher, competing based on product features and quality as well as price. A key feature of monopolistic competition is product differentiation. Each firm offers a unique twist—through branding, recipe, service, or design—so their products aren’t perfect substitutes. As a result, each firm faces a downward-sloping demand curve, giving it some control over price. However, this differentiation is only partial, so demand remains relatively elastic compared to monopoly, since consumers can still switch if prices rise too much. Firms invest in advertising and marketing to build customer loyalty and make demand for their product less elastic, enhancing their limited market power. In the short run, a firm in monopolistic competition can enjoy supernormal profits if it successfully differentiates its product or finds favour with consumers. However, these profits cannot last. With low barriers to entry, new firms are attracted, each vying for customers. As more businesses join, the demand curve for each existing firm shifts left,