In discussing industries that are neither monopolies nor perfect-competitive, economists have tended to begin from the four characteristics of a perfect-competitive industry. We recall that those characteristics are:.
• Many buyers and sellers .
• A homogenous product .
• Sufficient knowledge .
• Free entry .
Competition can be "imperfect" in an industry if the industry deviates from any one of the four. So, if there are just a few firms (but more than one), deviating from the first characteristic, the industry is said to be an "oligopoly." Since the nineteen-twenties, economists have also discussed the situation when an "industry" deviates only in the second characteristic. This is called "monopolistic competition," and we have "monopolistic competition" when a group of firms sell closely related, but not homogenous products. Instead, the products are said to be "differentiated products." So, the characteristics of "monopolistic competition" are:.
• Many buyers and sellers .
• Differentiated products .
• Sufficient knowledge .
• Free entry .
To say that products are differentiated is to say that the products may be (more or less) good substitutes, but they are not perfect substitutes. For an example of a monopolistically competitive "industry" we may think of the hairdressing industry. There are many hairdressers in the country, and most hairdressing firms are quite small. There is free entry and it is at least possible that people know enough about their hairdressing options so that the "sufficient knowledge" condition is fulfilled. But the products of different hairdressers are not perfect substitutes. At the very least, their services are differentiated by location. A hairdresser in Miami Downtown is not a perfect substitute for a hairdresser in city of Aventura although they may be good substitutes from the point of view of a customer who lives in Aventura but works in Miami Downtown.
