Editing Imperfect competition (section)

=== Monopolistic competition ===
{{Main|Monopolistic competition}}

A situation in which many firms with slightly different products compete. Moreover, firms compete by selling differentiated products that are highly substitutable, but are not perfect substitutes. Therefore, the level of market power under [[monopolistic competition]] is contingent on the degree of product differentiation. Monopolistic competition indicates that enterprises will participate in non-price competition.

Monopolistic competition is defined to describe two main characteristics of a market:

1. There are many sellers in the market. Each vendor assumes that a slight change in the price of his product will not affect the overall market price. The belief that competitors will not change their prices just because a vendor in the market changes the price of a product.

2. The sellers in the market all offer non-homogenous products. Companies have some control over the price of their products. Different types of consumers will buy the goods they like according to their subjective judgment.

There are two types of product differentiation:

* '''Vertical differentiation''': a product is unambiguously better or worse than a competing product (e.g. products that differ in efficiency or effectiveness); Customers select a product by using objective measures (e.g., price and quality) to rank their choices from best to worst.
* '''Horizontal differentiation''': a product that only some consumers prefer to competing products (e.g. Mercedes Benz and BMW). Customers make subjective choices about what they want to buy, because they have no objective criteria to distinguish the quality of products. Location and taste are important criteria to determine whether they are consumers' special preferences.  

Enterprises entering the monopolistic competition market may realize profit increase or loss in the short term, but will realize normal profit in the long run. If the price of the enterprise is high enough to offset the fixed cost above the marginal cost, it will attract the enterprise to enter the market to obtain more profits. Once the enterprise enters the market, it will occupy more market share by lowering the product price until economic profit reaches 0.<ref name=":0" />

Furthermore, each firm shares a small percentage of the total monopolistic market and hence, has limited control over the prevailing market price. Thus, each firms' demand curve (unlike [[perfect competition]]) is downward sloping, rather than flat. The main difference between monopoly competition and perfect competition lies in the paradox of excess capacity and price exceeding marginal cost.<ref>{{Cite book |last=Besanko |first=David |title=Economics of Strategy |publisher=Hoboken, NJ : John Wiley & Sons |year=2012 |isbn=9781118273630 |location=the United States  |pages=177–180 |edition=6th |language=English}}</ref>