| Monopolistic competition | A market where dozens of firms offer similar yet differentiated products |
|---|---|
| Product differentiation | A tactic used by firms to differentiate their product from that of their rivals |
| Oligopoly | A market in which a small number of interdependent companies dominate |
| Game theory | A technique for evaluating how firms interact strategically in an oligopoly market |
| Prisoner’s dilemma | According to game theory, when two or more firms, people, or groups try to figure out the optimal course of action for themselves by acting independently, the result is worse than if they had colluded or cooperated. |
| Dominant strategy | A scenario in game theory where a player's optimum strategy is independent of others' choices |
| Duopoly | A market comprising two firms |
| Nash equilibrium | In game theory, a non-co-operative situation in which each firm's optimal course of action is to keep up its current behaviour given the current behaviour of other firms in the market. |
| Cartel | A formal agreement for collusion between firms, typically to fix prices and output |
| Price leadership | An oligopolistic situation in which one firm sets or modifies its prices, and the others follow |
| Limit pricing | A tactic used by monopolies or oligopolies to drive away potential competitors by setting prices below that which will maximise profits. |
Monopolistic competition refers to a market in which there are a large number of firms producing goods that are similar but differ from one another in some way, making them close substitutes. An example of this would be the quality of service offered by hairdressers competing with one another in a big city. There are no entry barriers and firms in these marketplaces have some market power to set their prices like monopolies do. Moreover, because each company has a negligibly small market share, it should not worry about how its competitors would react when making decisions.
In short, monopolistic competition has the following key features: