The number of firms under monopolistic competition is very large. But the size of each firm is very small. The number of buyers is also large. The implication of large number of firms is that each firm produces or sells an insignificant portion of the total output. Hence, it cannot influence the market price by its individual action. Individual firm has not to bother about the reactions of the rival firms. It can follow an independent price and output policy.
2. Product differentiation:
Under monopolistic competition, each firm produces a differentiated product. Products are close substitutes but not perfect substitutes. Products are alike but not equal. For example, Close-up toothpaste is slightly different from Pepsodent toothpaste. Similarly, lux soap is slightly different from Cinthol soap. Monopolistic competition is found in case of toothpaste, toothbrush, toilet soap, washing shop, detergent power, shoes etc. here one product is different from another in the opinion of a consumer. The differences may be real or imaginary but it creates attachment. Product differentiation can be done by two ways. First, differentiating the quality of the product and second, by sales technique. Product differentiation protects market for the individual firms. Under monopolistic competition, consumers prefer one product to another. Here sellers can create demand for their products by skillfully displaying their salesmanship. Effective advertising techniques, attractive showrooms, home delivery system and credit facility, promptness of service and good behavior of the seller are some example of sales promotion.
3. Free entry and exit:
Firms under monopolistic competition are free to join and leave the industry. They produce close substitutes. Each firm is a monopolist regarding its own product. They command a meager amount of resources. Hence, in the event of losses they may easily quit the market. A firm has no control over other firms. There is open competition in the market. Firms may come and go away when they like.
4. Lack of perfect knowledge of the market:
There are innumerable products in the market. Each product is a close substitute of the other. As a result, buyers do not know about the products, their qualities and prices. Similarly, a seller does not know the exact preference of the buyers.
5. Advertisement Cost:
Under monopolistic competition, there are many firms. Products of their firms are not identical but slightly different. Each firm wants to sell larger amount of its own product. So it tries to establish superiority of its own product. Therefore, it makes advertisement. Expenditure on advertisement is known as the selling cost.