Solution:

Monopolistic competition:

• Monopolistic competition is a mid-way between perfect competition and monopoly.

• Under perfect competition, the number of sellers is very large and unlimited and under monopoly, there is an only a single seller of the product, while under monopolistic competition the number of sellers is relatively limited.

Some main definitions of monopolistic competition are as follows:

(1) a Large number of firms:

• There is a large number of firms or sellers operating under monopolistic competition but a relatively small fraction of the total market is shared by each firm or seller.

(2) Product differentiation:

• The second distinct feature of a monopolistic competitive market structure is product differentiation. The number of firms is large but their products differ from one another in colors, shape and size, brand, chemical composition, quality, trademark, packaging, durability, etc.

• For example, firms produce different kinds of bathing soap e.g. Hammam, Lux, Lifebuoy, Rexona, Dove, Ganga, Pears, Le Snaky, etc. but these products are close substitutes.

(3) Freedom of entry and exit:

• Under monopolistic competition, the firms are relatively free to enter the industry and exit from the industry, but they have no absolute freedom of entry into the industry.

• New firms are free to enter the market with new brands as a close substitute for the existing brands.

(4) Non-price competition:

• Under monopolistic competition, firms compete with one another without changing the price of their products.

• The firms attract potential buyers by offering them gifts, incentives, credit schemes, selling schemes, and other services. Thus, the firms compete other than price front.

(5) Price policy:

• Every firm has its price policy. Under monopoly and monopolistic competition the average revenue curve and marginal revenue curve are sloping downward means that the firm will have to fix low prices for fulfilling sales maximization as shown in

(6) Less Mobility:

• There is no perfect mobility of factors of production and goods and services in practical life. The factors are less mobile because of psychological reasons and disparity among the regions.

(7) No perfect knowledge:

• Under monopolistic competition, the buyers and sellers do not have perfect knowledge of the market conditions. The buyers and sellers of the products and owners of the factors of production are ignorant about the prices of the products and factor services.

(8) Selling Costs:

• Under monopolistic competition, each firm wants to promote the sales of its products by incurring selling costs. The expenditure incurred on advertisement and publicity to increase sales are called selling costs.

• The selling costs shift the demand for a firm's product and the rival firms also retaliate by incurring more and more selling costs.

(9) Close Substitutes:

• Under monopolistic competition, the product is not homogeneous products but they are close substitutes to each other which tends to create competition among the firms regarding their products.

(10) Group Equilibrium:

• Under monopolistic competition, the industry is not said to be in equilibrium but there is a position of group equilibrium for the group as a whole e.g. soap manufacturing group combine a group of soap manufacturers and that group itself needs to be in an equilibrium position.

• Group denotes the collection of firms producing unidentical but close substitutes.