Assumptions of The Model
- 1. Each firm is presumed to be able differentiate its product from that of its rivals. Cars are a good example here; they are very different, yet in direct competition with each other. This means there will be some customer loyalty, which allows for some flexibility for the firm to move to a higher price. In other words, not all of a firm's customers would leave for other products if the firm raised its prices.
- 2. This model dismisses the issue of interdependence when a firm sets its price. The firm will act as if it were a monopoly regarding the price it sets, not considering the potential responses from its competitors. The justification is that there are numerous firms in the market, so each receives only scant attention from the others.
Read more about this topic: Monopolistic Competition In International Trade
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