Association of Chartered Certified Accountants (ACCA) Certification Practice Test

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What is the main characteristic of monopolistic competition?

A few firms with identical products
Many producers using product differentiation
A single firm controlling the entire market
Two firms competing in a market

The correct answer is: Many producers using product differentiation

Monopolistic competition is characterized by the presence of many producers in the market who offer products that are differentiated from one another. This differentiation can occur through various means such as branding, quality, features, or customer service, allowing firms to compete not just on price but on the unique attributes of their products. Because of this product diversity, consumers have a wide choice and firms can maintain some degree of market power. In contrast to the other options, which depict market structures that do not align with monopolistic competition, the correct description emphasizes the importance of product differentiation. For instance, having a few firms with identical products relates more to perfect competition, while a single firm controlling the entire market describes a monopoly. The scenario with two firms competing does not capture the many firms aspect that defines monopolistic competition. Thus, the emphasis on many producers employing product differentiation accurately represents the nature of monopolistic competition.