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What are the characteristics of "monopolistic competition?"

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Dr. Reed Fisher of Johnson State College lists the key characteristics of monopolistic competition as the number of firms in the market, the ease of access to the market and product differentiation. In monopolistic competition, there are many firms and entry into the market is free. Additionally, consumers can substitute products for each other, but they are not identical.

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There are fewer firms in monopolistic competition than in a perfectly competitive market. Within a monopolistic competitive market, About.com explains that these firms all produce a similar item, which in economics is known as a substitute. This differs from a perfectly competitive market in which all the firms produce a distinguishable good.

According to Dr. Fisher, loyalty to a specific brand plays a key role in monopolistic competition. For instance, two soda brands are substitutes, but the brands aren't identical. However, people tend to choose one brand over the other regardless of the similar taste. Brand loyalty drives consumers to a particular firm within the market.

Firms also enter and exit the market without extraneous barriers common in monopolistic markets. About.com explains that firms enter the market as long as the current firms gain an economic profit, and the firms leave the market when economic profits no longer exist. Firms in monopolistic competition only receive short-run profit maximization, which limits the firms’ competition.

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