In monopolistically competitive industries, new producers, with their own distinct products, can enter the industry freely in the long run. For example, other food vendors would open outlets in the food court if they thought it would be profitable to do so. In addition, firms will exit the industry if they find they are not covering their costs in the long run.

Monopolistic competition, then, differs from the three market structures we have examined so far. It’s not the same as perfect competition: firms have some power to set prices. It’s not pure monopoly: firms face some competition. And it’s not the same as oligopoly: because there are many firms and free entry, the potential for collusion so important in oligopoly no longer exists.

We’ll see in a moment how prices, output, and the number of products available are determined in monopolistically competitive industries. But first, let’s look a little more closely at what it means to have differentiated products.