3.4 Monopolistic Competition at Work
Monopolistic competition involves many buyers, many sellers, and easy entry and exit with one difference. The sellers in these markets sell products that are closely related, but not identical. Joan sells jewelry boxes that are similar to other jewelry boxes in function and form, but they are nevertheless different. They are differentiated from the competition. Joan’s products are unique and differentiated because of their features (handcrafted, unique words, styling, etc.) and her unique brand.
As noted earlier, a purely competitive market has many buyers and sellers and each individual firm is a price taker. In this market, the price for a product or service is determined via market interactions (buying and selling) between consumers and producers. In perfectly competitive markets, there are many sellers, many buyers, and entry into and out of the market is easy. In a perfectly competitive market, Joan would price her jewelry boxes at prevailing market prices where marginal revenue equals marginal cost. In actuality, Joan can function as a quasi-monopolist or as a near-monopolist in the short term until the competition recognizes that they can make money selling unique jewelry boxes.