Monopolistic competition also has many competing firms and low barriers to entry, but differs from perfect competition in that the products are differentiated. Such differentiation can be in product quality, product features and marketing. The firms compete not just in price, but also in product differentiation. The demand curve faced by each firm is elastic, but downward sloping. Firms may have limited pricing power because of perceived differences among competing products.
The market for shampoo is a good example of monopolistic competition. Firms differentiate through features and marketing with claims like more attractive hair, anti-dandruff, and anti-hairloss features. As such features can have perceived value in some consumers, the shampoo manufacturers are able to price according to the demand for their products. This is why firm demand is downward sloping.« Back to Index