What is a key feature of monopolistic competition?

In monopolistic competition, a key feature is that many firms sell differentiated products. This means that while there are numerous competitors in the market, each firm offers a product that is distinct in some way—whether it be in terms of quality, features, branding, or customer service. This differentiation allows firms to have some degree of market power, enabling them to set prices above marginal cost, as consumers may have preferences for specific features.

The presence of many firms selling differentiated products leads to a competitive environment where businesses must continuously innovate and improve their offerings to attract customers. This dynamic fosters variety in the marketplace and can enhance consumer choice.

Other choices describe different market structures. For example, having only one firm (that offers a unique product) signifies a monopoly rather than monopolistic competition. The notion of no barriers to entry or exit and identical products is indicative of perfect competition, which contrasts with the product differentiation present in monopolistic competition. Hence, the description of firms in monopolistic competition as selling differentiated products accurately encapsulates its essence.