A market structure in which many firms sell products that are similar but not identical is known as what type of competition?

Introduction / Context:
Market structures in microeconomics describe how many firms there are in a market, how similar their products are, and how much control each firm has over price. One important form is where many sellers offer differentiated versions of a product that are close but not perfect substitutes. This question tests whether you can correctly name the market structure in which many firms sell similar but not identical products.

Given Data / Assumptions:

• There are many firms in the market.
• Products are similar but differentiated in some way (brand, quality, features).
• Each firm has some degree of market power due to product differentiation.
• Entry and exit are relatively easy in the long run.

Concept / Approach:
In perfect competition, many firms sell an identical product and no single firm has market power. In monopolistic competition, many firms sell differentiated products that are close substitutes but not identical. Because of differentiation, each firm faces a downward sloping demand curve and has some control over its own price. Oligopoly involves only a few large firms, and monopoly involves a single firm. The phrase “similar but not identical products” is a classic indicator of monopolistic competition in exam questions.

Step-by-Step Solution:
Step 1: Focus on the phrase “similar but not identical products”, which signals product differentiation. Step 2: Recall that perfect competition assumes identical or homogeneous products, so it cannot be the correct structure here. Step 3: Remember that monopolistic competition has many firms, free entry and exit, and differentiated products. Step 4: Match this description to the option “Monopolistic competition”.

Verification / Alternative check:
Think about real world examples such as branded toothpaste, fast food chains, or clothing brands. Many firms sell broadly similar items, but each brand has its own features, advertising, and loyal customers. These markets are commonly modeled as monopolistic competition. This mental check supports the choice of monopolistic competition for the given description.

Why Other Options Are Wrong:
Perfect competition: Assumes identical products and zero market power for individual firms. This contradicts the idea of similar but not identical products.
Imperfect competition in general: This is a broad term that covers several non perfect structures, but the question wants a specific type, and the textbook label is monopolistic competition.
Oligopoly: Involves only a few firms dominating the market, whereas the question implies many firms selling differentiated products.

Common Pitfalls:
A common mistake is to confuse monopolistic competition with general imperfections and to think of any differentiated product market as simply imperfect competition. Another pitfall is mixing up monopolistic competition with monopoly because of the word “monopolistic”. Remember that in monopolistic competition there are many firms, each with a mini monopoly over its own brand due to differentiation, but overall the market remains competitive.

Final Answer:
A market where many firms sell similar but not identical products is called monopolistic competition.