Answer to Question #225582 in Economics for Buli

Question

Monopolistic competition rests on the following assumptions?

Answer 1

The main assumptions of monopolistic competition are:

• Large number of firms - each firm has an insignificantly small share of the market.
• Independence - as a result of a large number of firms in the market, each firm is unlikely to affect its rivals to any great extent. In making decisions it does not have to think about how its rivals will react.
• Freedom of entry - any firm can set up business in this market.
• Product differentiation - each firm produces a different product or service from its rivals. Therefore each firm faces a downward sloping demand curve. This is the key difference from perfect competition. Product differentiation involves creating differences between products, either real or imagined, in consumers minds and is likely to involve various forms of non-price competition such as branding and advertising.