Question

why is the condition of transaction cost important for a perfect competition to prevail? And can many buyers and sellers in the monopolistically competitive markets influence each other?

Answer 1

In perfect competition the firm earns zero profit as the demand equals supply and there is equilibrium, it is one of the important factors that transaction costs are zero so that buyers and sellers do not incur costs in making an exchange of goods, if they incur a cost than there will be no market equilibrium and thus no perfect competition.

Monopolistic competition is a type of imperfect competition where many producers sell products which are differentiated from each other which is why these products are not perfect substitutes. Firms can freely enter and exit. Firms take the prices of other rivals as given and ignore the impact of its own prices on prices of other firms, thus as prices charged are taken as given the number of buyers and sellers in the monopolistically competitive market do not influence each other, as they charge prices according to their profit maximization.