Characteristics of monopolistic competition – 

(i) A large number of sellers and buyers.

(ii) Firms produce differentiated products.

(iii) Freedom of entry and exit from the market.

• Differentiated Product : Under monopolistic competition firms produce differentiated products, which are close substitutes of each other. If buyers prefer the product of a particular producer, that producer is in a position to influence the price.

Whereas, in a perfectly competitive market products are homogenous and firm is the price-taker. This makes monopolistic competition different from perfect competition.

Detailed Answer : Monopolistic Competition is a type of imperfect competition such that producers sell products that are differentiated from one another as goods but not perfect substitutes (such as from branding, quality, or location). Monopolistic Competition is found in the industry where there is a large number of sellers selling differentiated product to a large number of buyers. There is freedom of entry and exit for the firms. Characteristics of Monopolistic Competition :

(1) Large number of buyers and sellers,

(2) Product differentiation,

(3) Free entry and exit of firms.

Product differentiation makes monopolistic competition different from perfect competition. All the firms in the perfect competitive market sell homogeneous (identical) products. The products are perfect substitutes to one another. Whereas product differentiation or differentiated product is a distinct feature of monopolistic competition. Though the number of firms is large but their product differs in colour, shape, brand, quality, durability, etc.

It has two important implications:

(i) It allows a firm a partial control over price of its product.

(ii) It causes high elasticity of demand for the firm's product owing to the availability of a large number of close substitutes.