MONOPOLISTIC COMPETITION:
THE NEGATIVES

Monopolistic competition is a form of imperfect competition in which many producers produce similar but slightly differentiated products. This type of market structure has both positive and negative aspects. The most significant downside to monopolistic competition is that it causes resources to be allocated inefficiently. When there is a large number of firms competing for the same customers, each firm has an incentive to keep prices low so that they can attract more customers. This results in consumer surplus being reduced because the prices are not being set at a level that would maximise total economic surplus. Additionally, the firms have an incentive to engage in wasteful advertising and marketing campaigns in order to attract customers. This drives up the costs for the firms and can be a significant source of inefficiency. The inefficiency of monopolistic competition can be reduced by introducing policies that regulate and restrict advertising and marketing activities.