All of the following characteristics are common to both monopolistic competition and perfect competition except
The correct answer and explanation is:
The correct answer is “Product differentiation.”
Monopolistic competition and perfect competition share several common features, but product differentiation is a distinguishing characteristic of monopolistic competition that does not exist in perfect competition. Here’s an explanation:
- Perfect competition is a market structure where numerous firms sell identical products with no differentiation between them. These firms are price takers, meaning they must accept the market price determined by supply and demand. Consumers can easily switch between different suppliers because the products are homogenous. In this type of competition, the key features include perfect knowledge, no barriers to entry, and a large number of firms.
- Monopolistic competition has many firms as well, but the products they offer are differentiated in some way. Each firm sells a product that is similar to but not identical to its competitors, allowing them to have some control over the price. This differentiation can be based on branding, quality, features, customer service, or other factors. Firms in monopolistic competition are price makers, meaning they can influence the price of their products to some degree.
- Key Similarities:
- Both market structures have a large number of firms.
- Both allow for easy entry and exit of firms in the long run.
- Both have firms that are somewhat responsive to market conditions.
- Key Difference:
- In perfect competition, the lack of product differentiation means firms cannot charge a higher price than the market price.
- In monopolistic competition, firms can charge slightly higher prices due to the differentiation of their products, giving them a degree of monopoly power.
Thus, the feature that sets monopolistic competition apart from perfect competition is product differentiation, as perfect competition involves homogeneous products.