In monopolistic competition: a. firms collude with each other and act interdependently. b. there are a few sellers each offering a unique product. c. there are substantial entry barriers. d. there are many close substitutes for the products offered by each firm.
The correct answer and explanation is:
The correct answer is d. there are many close substitutes for the products offered by each firm.
In monopolistic competition, a market structure characterized by many firms, each offering a differentiated product, firms do not collude with each other. Instead, they compete by differentiating their products through various factors like brand, quality, features, and customer service. Despite the differentiation, the products offered by each firm are still considered close substitutes, which is a defining feature of monopolistic competition.
Here’s a more detailed explanation:
Monopolistic competition occurs when a large number of firms operate in a market, but each firm produces a product that is slightly different from the others. The key characteristic is product differentiation—each firm’s product is similar but not identical to those of competitors. This allows each firm to have some degree of market power, as they can influence the price of their product through their differentiation strategy.
However, because the products are close substitutes, consumers can easily switch from one product to another if the price of one rises too high or if they prefer a competitor’s version. This creates competition, as each firm tries to maintain or grow its market share by attracting customers with unique product offerings, promotional strategies, or other differentiators.
Unlike in monopoly, where one firm controls the market and faces no competition, firms in monopolistic competition face competition from other firms offering similar, though not identical, products. Because of this, firms cannot set prices as freely as they could in a monopoly—prices are influenced by consumer choice and competitors’ actions. Entry and exit in monopolistic competition are relatively easy, as there are no substantial barriers to entry like in oligopolies or monopolies.
Thus, the market features many firms offering similar but distinct products, making close substitutes central to the structure of monopolistic competition.