The main characteristics or features of monopolistic competition (imperfect competition) are as under:
(i) A fairly large number of sellers: The number of firms in monopolistic competition is fairly large. Each firm produces or sells a close substitute for the product of other firms in the product group or industry. Product differentiation is thus the hallmark of monopolistic competition.
(ii) Differentiation in products: Under monopolistic competition (imperfect competition), the firms sell differentiated products. Product differentiation may be real or imaginary. Real differentiation is done through differences in the materials used, design, color etc. Imaginary differences may be created through advertisement, brand name, trade marks etc. The firms producing similar products in this imperfectly competitive world cannot raise the price of product much higher than their rivals. If they do so, they will lose much of their sale, but not all the sale. In case, they lower the price, the total sale can be increased to a certain extent. How much will the sale increase or decrease by lowering or raising the price will depend upon the product differentiation of the different firms.
If the product of the various firms are very close substitutes of one another and no imaginary or real difference exists in the mind of the buyers, then a slight rise or fall in the price of the product of one firm will appreciably decrease or increase the demand for the product. If the product of one firm differs from that of other firm, (though the difference may be an imaginary one) a slight rise in the price of the product of one firm will not drive away all its customers. A few faithless buyers may be attracted by the low price of the other rival product but not all the buyers.
(iii) Advertisement and propaganda: Another very important characteristic of the monopolistic competition is that each firm tries to create difference in its product from the other by advertising, propaganda, attractive packing, nice smile, etc. When it succeeds in its object, the firm occupies almost the position of a monopolist. It is, thus, in a position to raise the price of the product without losing its customers.
(iv) Nature of demand curve: Since the existence of close substitutes limits the monopoly power, the demand curve faced by a monopolistically competitive firm is fairly elastic. The precise degree of elasticity will however, depend upon the number of firms in the group product or industry. If the number of firms is fairly large and the product of each firm is not very similar, the demand curve of a firm will be quite elastic. In case, there is close competition among the rival firms for the sale of similar products, the demand curve of a firm will be less elastic.
(v) Freedom of entry and exit of firms: The entry of new firms in the monopolistic competition industry is relatively easy. There are no barriers of the new firm to enter the product group or leave the industry in the long run.
(vi) Sales efforts: With heterogeneous products, the sale of the products by the firms can no longer be taken for granted sale depends upon sale efforts.
(vii) Non-price competition: In monopolistic competition (imperfect competition), the firms make every effort to win over the customers. Other than price cutting, the firms may offer after sale service, a gift scheme, discount not declared in the price list, etc.