Monopolistic competition is a market situation where there is a large number of buyers and sellers selling closely related goods but surely not homogeneous.
For example, take the case of tooth-paste, most commonly used commodity. There are many tooth pastes in the market, such as Colgate, Cibaca, Close-up, Pepsodent, etc. These are all closely related goods but there may be difference in quality, colour, size, taste etc. which separate them from one another. Each producer has a monopoly control over his own product but competition exists between them. Thus, we find a combination of monopoly and competitive elements. Similarly, we can take another example of toilet soap. There is a large number of firms producing different brands or varieties of soap, e.g. Hamam, Pears, Lifebuoy, Lux, Nirma etc. Each firm enjoys monopoly over its brand. For instance, Hindustan Lever Ltd. has monopoly over the trademark Lux. But there is a competition among these firms producing soap. Similarly, markets of so many products like tea, shoes, shampoo, watches, clothes, fans, bulbs, T.V. sets, pens, sewing machines, washing machines, etc. are example of monopolistic competition.
In real life, neither perfect competition nor monopoly are seen. Almost, every market seems to have the features of both perfect competition and monopoly, Economists call such a market as monopolistic competition or imperfect competition. The concept of monopolistic competition was developed by an American economist Prof. Chamberlin while Mrs. Joan Robinson gave the concept of imperfect competition. According to Left witch, “Monopolistic competition is a market situation in which there are many sellers of a particular product, but the product of each seller is in some way differentiated in the minds of consumers from the product of every other seller.” Thus, monopolistic competition is the blending of two extreme markets viz. perfect competition and monopoly.