What is the defining characteristic of a monopolistically competitive firm?
a. Monopolistically competitive firms are price makers
b. Differentiated product
c. Monopolistically competitive firms do not make economic profits in the long run
d. There are many small sellers in the market
All the above points are the characteristics of a monopolistically competitive firm. However, the defining characteristic is –
b. Differentiated products.
Differentiated products are those which are close substitutes to each other.
Product differentiation is a situation when the buyers of the product differentiate the product with other.
Generally, the products of different firms are not altogether different; they are slightly different from others (close substitutes).
It refers to differentiating the products on the basis of brand, size, color, shape, etc. The product of a firm is close, but not perfect substitute of other firm.
Other options are cannot be called as defining characteristic because they either prevail in the monopoly or perfect competition. Product differentiation is the only unique characteristic of monopolistic competition market.
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