What Is Monopolistic Competition?

By Jeremy Bowman – Updated Dec 18, 2024 at 12:43 PM

Key Points

Monopolistic competition has many sellers offering slightly different products, enhancing consumer choices.
Markets with monopolistic competition are considered advantageous for both businesses and consumers.
Investors should note trends and differentiation in monopolistic competition to identify profitable companies.

Monopolistic competition is a kind of market dynamic that describes many of the industries we encounter every day. In monopolistic competition, an industry includes a large number of sellers that offer similar but not identical products. Businesses in monopolistically competitive markets tend to compete on price, quality, marketing, customer service, and other such factors.

Two people's hands engaged in a tug-of-war with a rope. — Source: Getty Images

How does monopolistic competition work?

By definition, monopolistic competition refers to a market with a large number of companies competing against each other. These industries tend to have low barriers to entry, and competitors aim to differentiate themselves in various ways, such as through location, packaging, or the product itself.

Some examples of markets based on monopolistic competition include restaurants, clothing stores, service businesses like auto mechanics, and convenience stores.

Loading paragraph...

What Are the 11 Stock Market Sectors?

The larger stock market is made up of multiple sectors you may want to invest in.

Average Stock Market Return

Stock market results can vary wildly from year to year.

What Makes a Stock Price Go Up?

Stock price increases can be about more than supply and demand.

The Top Stock Market Companies to Watch in 2025

There are more than 10,000 publicly traded companies on U.S. stock exchanges. Here are the largest ones.

What’s an example of monopolistic competition?

One example of monopolistic competition is the restaurant industry. Let’s say you want to buy a hamburger. You have a wide range of choices across different price points. You could go to a fast-food restaurant, a bar and grill, a full-service restaurant, or even an upscale restaurant. They will all offer similar, but not identical, products.

These places are all competing with each other to sell you a hamburger, and the multitude of options will ensure that prices are competitive and reflective of the costs required to make a hamburger.

Understanding monopolistic competition and other market structures can help you make better decisions as an investor. In general, it’s better to invest in industries that lean toward monopoly, but that’s not always true. Even in a monopolistic competition, some businesses can stand out by differentiating their products, allowing them to earn bumper profits.

It’s also worth paying attention to consolidation trends in individual industries since markets can change over time as the market evolves and new entrants come in or others leave.

As we look forward to the next bull market, it’s a good idea to review monopolistic competition and the other market structures so you know what market dynamics will affect the stocks you own.

About the Author

Jeremy Bowman has been a contributing Motley Fool stock market analyst, covering technology, consumer goods, and macroeconomic trends since 2011. Before The Motley Fool, Jeremy was a newspaper reporter, restaurant manager, and English teacher abroad. He holds a bachelor’s degree in English from Colorado College and a master’s degree in business administration from American University. One of his Motley Fool headlines was briefly featured on Late Night with Stephen Colbert.

TMFHobo

@TMFBowman

Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Jeremy Bowman has positions in Netflix and Walt Disney. The Motley Fool has positions in and recommends Alphabet, Netflix, Walt Disney, and Warner Bros. Discovery. The Motley Fool has a disclosure policy.

What other kinds of market structure are there?

There are four major kinds of market structure. In addition to monopolistic competition, there are perfect competition, oligopoly, and monopoly.

Most industries are either monopolistic competitions or oligopolies; there are fewer examples of perfect competition and monopoly.

In a perfect competition, products are identical, there are no barriers to entry, and buyers have perfect information, meaning prices are set by the market rather than companies. The best examples of perfect competition are some commodity markets for things like agricultural products and raw materials.

Oligopoly is defined by a handful of large competitors. Because there are fewer competitors, barriers to entry tend to be high and there is less price competition. One example of an oligopoly market is the media. There are a few big media companies that dominate the market for television and video entertainment, including Netflix (NFLX +2.79%), Disney (DIS +0.70%), and Warner Bros. Discovery (WBD +3.86%). These are large companies, and you would need a lot of capital to compete with them. Airlines are another example of an oligopoly.

Finally, in a monopoly, one company has dominant market share, allowing it to create large barriers to entry and earn wide profit margins. One example of a monopoly is Alphabet’s (GOOG +0.00%)(GOOGL -0.10%) Google Search, which has more than 90% market share in many of its markets, which has made it one of the most profitable businesses in the world.