Consider a market structure where the number of firms is large, there is free entry and exit of firms, but the goods produced by them are not homogeneous. Such a market structure is called ______.

Question

Question

This question was previously asked in

SSC GD Constable (2022) Official Paper (Held On : 16 Jan 2023 Shift 3)

Answer 1

The correct answer is monopolistic competition.

Key Points

Monopolistic Competition is a market structure in which there is a large number of sellers in the market of a commodity, but the product of each seller differs in some respect from the product of the other sellers.
Thus, product differentiation is the cornerstone of Monopolistic Competition.
Monopolistic competition is like an amalgam of monopoly and perfect competition, and hence the name Monopolistic Competition.
According to J.S. Bains, “Monopolistic Competition is a market structure where there is a large number of sellers, selling differentiated but close substitute products.”
In a monopolistically competitive market, there are many firms that sell slightly differentiated products.
The free entry and exit of firms suggests a competitive market, but the non-homogeneity (or differentiation) of goods introduces a degree of monopoly power for each firm.