Leo manages the Wonderful Wok stand in the food court of a big shopping mall. He offers the only Chinese food there, but there are more than a dozen alternatives, from Bodacious Burgers to Pizza Paradise. When deciding what to charge for a meal, Leo knows that he must take those alternatives into account: even people who normally prefer stir-fry won’t order a $15 lunch from Leo when they can get a burger, fries, and drink for $4.

But Leo also knows that he won’t lose all his business even if his lunches cost a bit more than the alternatives. Chinese food isn’t the same thing as burgers or pizza. Some people will really be in the mood for Chinese that day, and they will buy from Leo even if they could dine more cheaply on burgers. Of course, the reverse is also true: even if Chinese is a bit cheaper, some people will choose burgers instead. In other words, Leo does have some market power: he has some ability to set his own price.

So how would you describe Leo’s situation? He definitely isn’t a price-taker, so he isn’t in a situation of perfect competition. But you wouldn’t exactly call him a monopolist, either. Although he’s the only seller of Chinese food in that food court, he does face competition from other food vendors.

Yet it would also be wrong to call him an oligopolist. Oligopoly, remember, involves competition among a small number of interdependent firms in an industry protected by some—albeit limited—barriers to entry and whose profits are highly interdependent. Because their profits are highly interdependent, oligopolists have an incentive to collude, tacitly or explicitly. But in Leo’s case there are lots of vendors in the shopping mall, too many to make tacit collusion feasible.

Economists describe Leo’s situation as one of monopolistic competition. Monopolistic competition is particularly common in service industries like restaurants and gas stations, but it also exists in some manufacturing industries. It involves three conditions: large numbers of competing producers, differentiated products, and free entry into and exit from the industry in the long run.

In a monopolistically competitive industry, each producer has some ability to set the price of her differentiated product. But exactly how high she can set it is limited by the competition she faces from other existing and potential producers that produce close, but not identical, products.