Florida Teacher Certification Examinations (FTCE) Social Science Practice Test

Which of these choices is not a characteristic of monopolistic competition?

1. Many firms sell products that are similar

2. Unique products offered by each firm

3. Firms are price makers rather than price takers

4. Limited barriers to entry in the market

The correct answer is: Firms are price makers rather than price takers

In monopolistic competition, firms have some control over their pricing, allowing them to be price makers rather than price takers. This characteristic is tied to the differentiation of products that firms offer. Each firm sells products that, while similar to those of competitors, have unique features or branding that gives them a degree of market power. This ability to influence price results from the product differentiation along with the presence of many firms in the industry. The presence of many firms selling similar yet differentiated products means that while companies compete for the same customer base, each one can set its prices based on its unique offerings. Limited barriers to entry also allow new firms to join the market relatively easily, contributing to the competitive environment typical of monopolistic competition. In contrast, being a price taker is associated more with perfect competition, where individual firms must accept the market price determined by supply and demand, lacking the power to influence it due to the uniform nature of the products sold and the high level of competition. Therefore, the distinction of being a price maker is a significant aspect of monopolistic competition.