A significant benefit of monopolistic competition compared with pure competition is Multiple Choice greater product variety. stronger incentives to achieve economies of scale. improved resource allocation. less likelihood of X-inefficiency
The Correct Answer and Explanation is:
The correct answer is greater product variety.
A significant benefit of monopolistic competition, especially when contrasted with the theoretical model of pure competition, is the wide range of choices it offers to consumers. This advantage stems directly from the core characteristic of monopolistic competition: product differentiation.
In a purely competitive market, all firms sell identical, standardized products. Think of agricultural commodities like a specific grade of wheat or corn; a bushel from one farmer is indistinguishable from another’s. While this structure can lead to maximum productive and allocative efficiency, it offers no variety for the consumer.
Conversely, firms in monopolistic competition strive to make their products distinct from their rivals’. They compete not only on price but also on quality, design, branding, location, and service. This differentiation creates a diverse marketplace. For example, consider the market for coffee shops, restaurants, or clothing. Consumers can choose from countless brands and styles that cater to their specific tastes, preferences, and budgets. This ability to satisfy a wide spectrum of consumer wants is the primary social benefit of monopolistic competition.
The other options are incorrect. Monopolistic competition does not have stronger incentives to achieve economies of scale; firms typically operate with “excess capacity,” meaning they produce at a level below the most productively efficient point. Resource allocation is less efficient than in pure competition because price is set above marginal cost (P > MC). Finally, the intense rivalry in both market structures provides strong pressure to avoid X-inefficiency, so there is no clear advantage for monopolistic competition in this regard. Thus, greater product variety remains the key trade-off for the model’s inefficiencies.
