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What is Monopolistic Competition?

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Last editedJan 20212 min read

Monopolistic competition is an essential concept for business owners to understand, as it can have serious implications for the long-term viability of your business. If you’re operating in an industry of monopolistic competition, it can be hard to turn a profit in the long run. 

Here, we’ll take a close look at monopolistic competition, and why it matters to you and your business. 

What is the definition of monopolistic competition?

The definition of monopolistic competition is that your industry or market is full of competitors. Each of your competitors offers a product or service similar to yours, or even identical. Barriers to entry are very low, but you risk going out of business if you can’t differentiate yourself from the competition. 

Whether you know it or not, you’re likely already operating under conditions of monopolistic competition. 

Characteristics of monopolistic competition

A number of characteristics define the conditions of monopolistic competition. These include:

  • Many companies targeting the same customer base

  • Companies all produce similar but differentiated products

  • Low barriers to entry (and exit)

  • Companies have little power to raise profits by increasing prices

  • Competition is based on product quality, price and marketing

  • Companies can be profitable in the short term, but find it harder to secure long-term profitability 

Examples of monopolistic competition

When we consider the characteristics of monopolistic competition, we can see that it is rife in every town’s average retail district. Some of the more common examples include:

  • Clothing and accessories

  • Restaurants, bars and hotels

  • Sporting goods

  • Consumer electronics

  • Consumer services such as nail salons and hairdressers

Every example has its fair share of success stories. But many businesses risk being forced into obscurity by competitors that, for whatever reason, have made a bigger impression on customers. 

Thriving in a monopolistically competitive market

The majority of small to medium-sized businesses operate in conditions of monopolistic competition. If this includes you, it should be clearer than ever that you can’t afford to rest on your laurels. Statistically speaking, the odds are against you. And the longer you remain in business, the more chance there is for your margins to erode as hungry new competitors emerge on the market. 

Because of the low barriers to entry, monopolistic competition means that there is always a revolving door of competitors, any one of which would be only too happy to relieve you of your customers. This is why you need to know your USP, the proverbial “special sauce” that loyal customers can get only from you. 

To thrive in the long term in these conditions, you will need to:

  • Ensure that competitive analysis is an ongoing process that drives your decision-making

  • Maintain a strong brand identity that’s aligned with what your customers want and expect from your products

  • Make sure your standards of customer service remain high, and that your employees are well trained and empowered to deliver excellence

  • Find ways to drive down sundry expenses without compromising the quality of products or services that you offer 

  • Ensure that your pricing remains competitive, without decimating your profit margins

  • Never lose sight of the customer experience

We can help

If you’re interested in finding out more about monopolistic competition, brand differentiation and staying ahead of the pack, then get in touch with the financial experts at GoCardless. Find out how GoCardless can help you with ad hoc payments or recurring payments.

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