In monopolistically competitive markets, firms experience free entry and exit, differentiate their products, and are not price takers, differing from perfect competition where products are identical and firms are price takers.
- In a monopolistically competitive market, firms have some characteristics that different from conditions of perfect competition.
- One of the key traits of a monopolistically competitive market is that firms can enter or exit the market without restriction, similar to perfect competition where there is free entry and exit into and out of the market.
- However, unlike perfect competition where each firm produces an identical product, in monopolistic competition, each firm produces a product that is differentiated in some way from those of other firms in the market.
- Another distinction is that, in a monopolistically competitive market, firms do not take the price as given; instead, they have some power to set prices because their products are not identical.
- Therefore, they are not price takers like firms in a perfect competition setting.
- Lastly, there are many sellers in both monopolistic competition and perfect competition, but the products in the former are not perfect substitutes as they are in the latter.