When Sean and Jayne Douglas started their winery, they knew that differentiating their product would be critical for success. The wine industry in Canada, as in most other countries, is populated by numerous producers all selling wine but differentiated—perhaps by developing unique blends, altering the production process, or marketing in different segments. This is what economists call a monopolistically competitive industry. As such, wineries have important lessons to teach firms in other industries with similar market structures who face the same challenges.

Within the four major market structures recognized by economists—monopoly, oligopoly, monopolistic competition, and perfect competition—monopolistic competition is perhaps the most common. It combines some features of monopoly with perfect competition. Monopolistic competition is characterized by three conditions: many producers in the market, differentiated products, and free entry and exit into the industry in the long run. In a monopolistically competitive market, each producer has some ability to set its product’s price, but exactly how high is limited by what the competition is doing.

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