Monopolistic Competition

Benefiting From Product Differentiation
In the same way competitive companies that operate in the free markets, the industries that show monopolistic competition have a lot of companies that compete amongst each other. However the difference from the free market situation, in which all the companies sell the same and identical product, in monopolistic competition the product of each company is slightly different.

Let’s take a look at the gasoline market. Any big or mayor city has a lot of gas stations, and they all sell gasoline which is somewhat the same as the other. However, if you look at a gas station more widely, you will realize that each one has a product that is slightly different from the one the others offer.

To give you an example of this, now there are many gas stations that accept credit cards, while there are others that will clean your windshields for free or give you free air service etc. Besides this, each gas station is different from the rest because it is located in a unique place, which is something very important for the people living in the neighborhood or close by.

Economy experts use the term product differentiation to describe the things that make the product of each company a little bit different from the products of the competitors. The general result of these differences is that they slightly reduce the intensity of the competition. Your local gas station for example, may charge you a couple cents more per gallon if they have a very nice set up and the nearest competitor might be several miles away.

On the other hand though, there is not very much competitive pressure in the industry. While the local gas station might be able to take advantage of its unique characteristics and services in order to charge you a little bit more, they cannot charge you very much more because if they tried to, you would go somewhere else to get your gasoline.

A similar situation to this is neighborhood restaurants that have to observe and be aware about the prices in other restaurants, even if they specialize in different types of cooking. While it is true that you may be willing to pay a big more for something different and new, you will most likely not be willing to pay twice as much on it. The differentiation of products reduces, but it does not eliminate the price competition.