The market situation in which there is a large number of firms whose outputs are dose but not perfect substitutes, because of either product differentiation or geographical fragmentation of the market. The fact that the products are not homogeneous means that any one firm may raise its price relative to the prices of its competitors without losing all its sales, so that its demand curve is downward-sloping rather than a horizontal straight line (as in perfect competition). The combination of a large num ber of firms, as in perfect competition, with downward-sloping demand curves, as in monopoly, is responsible for the term ‘monopolistic competition’. The theory was developed in the 1930s virtually simultaneously by E. H. Chamberlin in the U.S. and J. V. Robinson in the U.K.
Reference: The Penguin Dictionary of Economics, 3rd edt.
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