10 Monopolistic Competition Examples

Monopolistic competition occurs in markets where there are multiple similar products that are not perfect substitutes to one another.

Because each product is unique, it occupies its own niche lane and there’s no direct alternative. However, at the same time, some competition exists, because a consumer can shift to a similar (but not identical) type of product that may help them solve their problem.

Example: The prime example of monopolistic competition is restaurants. You may own the only Mexican restaurant in your neighborhood. You have the monopoly on Mexican food. But at the same time, you’d need to be aware that consumers might just turn around and go to the Italian restaurant if you don’t satisfy those Mexican-loving consumers.

Monopolistic Competition Definition

Monopolistic competition is half-way between monopoly and perfect competition (thus, we call it a form of imperfect competition).

Here is an overview of those two concepts:

• Monopoly: A firm is the only firm selling its products and services. As a result, it can set the prices in wants. Consumers have no alternative but to purchase from that firm, if it wants that product.
• Perfect competition: There are sufficient sellers of a product, as well as informed buyers, that buyers can shop around for their product and purchase the one that best suits them. As a result, companies have minimal control over price as the market sets the rate. The market is at an equilibrium in which the supply of every product or service is equal to the demand.

Between these two extremes we may experience monopolistic competition, where producers compete against one another indirectly. They don’t sell the same products (their products are differentiated), yet consumers still have a choice to move to a similar product that may still achieve their end-goal.

Examples of industries that operate under monopolistic competition include restaurants, clothing, cereal, shoe brands, and service industries.

In fact, most brands attempt to create monopolistic competition by engaging in marketing campaigns that differentiate their products from other brands, thereby monopolizing a niche within the market. For example, if two brands sell window washer, one brand might market theirs as the ‘eco alternative’ to monopolize a niche consumer. 

10 Examples of Monopolistic Competition

• Restaurants: Restaurants typically offer the same types of foods with little to no difference in terms of quality, most of the time. Therefore, the competition between restaurant companies is monopolistic.
• Clothing stores: Clothing stores generally offer very similar products that are differentiated mainly through branding. 
• Shoe stores: Shoes, like clothing, are mainly differentiated through branding and marketing rather than actual quality. 
• Bakeries: Like restaurants, rarely have drastic differences in terms of what they offer, but they do differentiate their products through special packaging and branding.
• Grocery stores: Grocery stores operate within a monopolistically competitive market because competing firms mostly sell the same goods in terms of use-value, but differentiate their products through branding and marketing. 
• Hotels: Every hotel company offers a similar service with only slight variations (if we account for price) in terms of quality. 
• Coffee shops: Coffee shops are much like restaurants and bakeries in the sense that their products are rarely different if we don’t account for branding.
• Toothpaste: Kinds of toothpaste are all generally the same, but different companies try to make their product stand out through advertisements. 
• Soap: Soap is similar to toothpaste because there are little to no differences between how effective different soaps are. Nevertheless, competitors differentiate their products through special packaging, brand images, and so on. 
• Air conditioners: Air conditioners, accounting for price, generally have the same capabilities, but companies differentiate their products through branding and marketing. 

Pros and Cons of Monopolistic Competition

Strengths

• Variety: Since the products or services in a monopolistically competitive market are differentiated, consumers always have several options to choose from.
• Decision-making power for firms: Firms in monopolistic competition have greater decision-making power regarding prices, entry, exit, and marketing, because they can differentiate themselves into a niche that has no direct (only indirect) competitors.

Weaknesses

• Misleading advertising: Brands often create monopolistic competition by differentiating themselves through advertising (rather than actual product differentiation), which often ends up being misleading (Perloff, 2008). 
• Inefficiency: Monopolistically competitive markets are generally inefficient because of the amount of marketing and differentiation required (and inefficient companies don’t die out under monopolistic competition).
• Waste: Since firms are incentivized to differentiate their products, they tend to produce waste through useless materials and excess packaging.
• Consumer burden: The excessive amount of choice – and each brand attempting to differentiate itself – burdens consumers with a lot of research and background checks before making a purchase.

Conclusion

Monopolistic competition is a form of imperfect competition in which competing producers sell differentiated products, have some amount of market and decision-making power, have few or no barriers to entry and exit, and generally have more information than the consumers.

References

Chamberlin, E. (1962). The Theory of Monopolistic Competition: A Re-orientation of the Theory of Value. Harvard University Press. (Original work published 1933)

Colander, D. C. (2008). Microeconomics. McGraw-Hill/Irwin.

Eatwell, J., Milgate, M., & Newman, P. (1991). The World of Economics. Palgrave Macmillan UK.

Gans, J. (2003). Principles of Economics. Thomson Learning.

Goodwin, N. R., Nelson, J. A., Ackerman, F., & Weisskopf, T. (2009). Microeconomics in Context. M.E. Sharpe.

Hirschey, M. (2000). Managerial Economics. Dryden Press.

Hussain, S. A., & Samuelson, W. M. economics. (2003). Study guide to accompany Managerial economics, fourth edition [by] William F. Samuelson, Stephen G. Marks. Hoboken, N.J. : Wiley. http://archive.org/details/isbn_9780470000410

Krugman, P. R., & Obstfeld, M. (2009). International Economics: Theory and Policy. Pearson Addison-Wesley.

Krugman, P., & Wells, R. (2008). Microeconomics. Worth Publishers.

Perloff, J. M. (2008). Microeconomics: Theory & Applications with Calculus. Pearson Addison Wesley.