What characterizes monopolistic competition?

• A. A single seller dominating the market
• B. Many companies selling identical products
• C. Many firms selling similar but differentiated products
• D. A complete lack of competition among firms

Answer: (C)

Monopolistic competition is characterized by many firms in the market that sell similar but differentiated products. This differentiation can occur through branding, quality, features, or customer service, allowing each firm to have some degree of market power while still competing with others. In this structure, firms strive to attract customers by offering products that they perceive as unique or superior compared to their competitors, leading to a diverse marketplace.

The presence of many firms in monopolistic competition means that while companies compete against each other, they do not do so on the basis of identical products, which distinguishes this market structure from perfect competition. Instead, businesses can set their prices above marginal cost to some extent due to the perceived differences in their offerings. This allows for healthy competition, innovation, and consumer choice, essential elements of a dynamic economy.

The other scenarios presented do not accurately depict monopolistic competition. A single seller dominating the market suggests monopoly rather than competition. Many companies selling identical products would align more closely with perfect competition, where firms have no control over pricing due to the homogeneity of goods. A complete lack of competition among firms would imply either a monopolistic or oligopolistic scenario, where firms would not face the pressures that characterize monopolistic competition.