Enforcement Officer / Accounts Officer (EO/AO) 2017 recruitment test. Transcribed from the Commission's own booklet (series A, GRS-A-TNS); answer as per the official UPSC final answer key. This question is in Part B. Answer last reviewed 24 August 2026.

Which one of the following is not a feature of monopolistic competition?

(a)Large number of buyers and sellers in the market
(b)Differentiated products constitute the market
(c)Product in the market is homogeneous
(d)Selling costs are used for sale promotion

Answer

Why

Correct — C, (c) Product in the market is homogeneous. Homogeneity is the badge of perfect competition, and it is the one thing monopolistic competition cannot have. Monopolistic competition was named and modelled by Edward H. Chamberlin in The Theory of Monopolistic Competition (1933); Joan Robinson's The Economics of Imperfect Competition appeared the same year and reached the neighbouring result by another route. The market form rests on one idea: there are many sellers, but each sells a product buyers can tell apart from the rest. The differentiation may be real (formulation, quality, durability, after-sales service) or purely perceived (brand, trademark, wrapper, the location of the shop); all the model needs is that some buyers prefer this seller's variety even when the prices are the same. That differentiation generates every other feature on the list. Because the varieties are close but imperfect substitutes, each firm faces a demand curve that slopes downward — highly elastic, because a rival's variety is nearly as good, but not horizontal. A downward-sloping demand curve gives the firm a little price-setting power of its own, and that is the 'monopolistic' half of the name; the large number of sellers and free entry and exit are the 'competition' half. Now read option (c) against that. If the product were homogeneous, buyers would be indifferent between sellers, every firm's demand curve would be horizontal at the ruling price, and no firm could raise its price without losing all its custom. That is the definition of perfect competition. It also destroys options (b) and (d) in one stroke: with a homogeneous product there is nothing to differentiate and nothing worth advertising. Option (c) therefore does not merely fail to appear in the model — it contradicts the other three statements, which is exactly the shape the Commission wants when it asks which one is not a feature. The word 'not' is printed in bold italic in this stem. That emphasis is part of the question: three of the four statements are true of monopolistic competition and the task is to reject the fourth, not to pick the best.

Why the others are wrong

(a)Large number of buyers and sellers in the market — This is a genuine feature, shared with perfect competition. Monopolistic competition assumes a large number of buyers and a large number of sellers, each holding so small a share of the market that no firm's price or output decision provokes a reaction from any identifiable rival. That assumption is what separates monopolistic competition from oligopoly, where the sellers are few, each is large enough to matter to the others, and strategic interdependence — the game-theoretic guessing about what a rival will do — becomes the central fact. Because the statement is true of the model, it cannot be the answer to a question asking which feature is absent.
(b)Differentiated products constitute the market — This is not merely a feature — it is the defining feature, and choosing it inverts the question. Chamberlin's whole point was that products in most real markets are differentiated: toothpaste, soap, restaurants, coaching classes and tailoring shops all sell recognisably distinct things while competing for the same buyers. Differentiation is what gives each seller a partial monopoly over its own variety, and it is the reason the firm's average revenue curve slopes downward instead of lying flat. A candidate who marks (b) has identified the right idea and then answered the opposite of what was asked, which is the trap a bold-italic 'not' is printed to prevent.
(d)Selling costs are used for sale promotion — Selling costs are a real feature of the model, and one of Chamberlin's own contributions to price theory. He distinguished production costs, incurred to make the product, from selling costs — advertising, salesmanship, display, free samples — incurred to shift the demand curve for it. Selling costs are meaningful only where products are differentiated, because their purpose is to persuade buyers that one variety is preferable. Under perfect competition, where every unit is identical and sells at the ruling price, spending on advertising would be pure waste, so the textbook figure for selling costs there is zero. The presence of selling costs in this list is therefore consistent with monopolistic competition, not an exception to it.

Concept

Market forms are classified by three tests: how many sellers there are, whether the product is homogeneous or differentiated, and how free entry into the market is. Perfect competition has very many sellers, a homogeneous product and free entry, so each firm is a price-taker facing a horizontal demand curve on which average revenue equals marginal revenue equals price. Monopoly has one seller and no close substitute, so the firm is the industry and faces the whole downward-sloping market demand curve. Oligopoly has a few sellers, homogeneous or differentiated, and is governed by interdependence. Monopolistic competition sits between the first two: many sellers, but a differentiated product, so each firm faces its own steeply elastic downward-sloping demand curve and free entry drives long-run profit down to normal. The long-run equilibrium of the model is the tangency solution — the average revenue curve just touches the long-run average cost curve, so price equals average cost and the firm earns only normal profit, but the tangency occurs to the left of the minimum point of the average cost curve. The gap between the output the firm actually produces and the output at which average cost would be lowest is the famous excess capacity of monopolistic competition, and price stays above marginal cost even in the long run.

EPFO's economics block opens with pure theory before it turns to policy, and market structure is the standard opening because it can be tested in one line. What the item rewards is not a memorised list but the ability to sort a feature to the market form it belongs to — homogeneity to perfect competition, differentiation and selling costs to monopolistic competition, interdependence to oligopoly, absence of substitutes to monopoly. The examiner has built the item so that the odd one out is not merely absent from the model but incompatible with two of the other options, which is a useful cross-check whenever a negative question offers a list of features.

Key facts

Monopolistic competition was developed by Edward H. Chamberlin in The Theory of Monopolistic Competition (1933); Joan Robinson's The Economics of Imperfect Competition appeared in the same year.
Its features: a large number of buyers and sellers, a differentiated product, selling costs, free entry and exit, and a downward-sloping but highly elastic demand curve for each firm.
A homogeneous product is the defining feature of perfect competition, where the firm is a price-taker and average revenue equals marginal revenue equals price.
Product differentiation may be real or imaginary; a brand name or a shop's location differentiates as effectively as a change in formulation.
Chamberlin separated production costs from selling costs — the second are incurred to shift the demand curve, not to make the good.
Selling costs are zero under perfect competition, because an identical product sold at the ruling price cannot be advertised into a higher price.
In long-run equilibrium the firm earns only normal profit: the average revenue curve is tangent to the long-run average cost curve.
That tangency lies to the left of the minimum of the average cost curve, which is why the model predicts excess capacity and a price above marginal cost.
The number of sellers being large means no firm reacts to any identified rival — that is what distinguishes monopolistic competition from oligopoly.

Market forms are sorted by three tests: how many sellers, homogeneous or differentiated, how free is entry

(c) A homogeneous product→The badge of perfect competition, and the one thing monopolistic competition cannot have. If the product were homogeneous, buyers would be indifferent between sellers, every firm's demand curve would be horizontal at the ruling price, and no firm could raise its price without losing all its custom.

It also destroys the other three→With a homogeneous product there is nothing to differentiate and nothing worth advertising. Option (c) does not merely fail to appear in the model — it contradicts the other statements, which is exactly the shape a 'which one is not a feature' item wants.

(b) Differentiated products — the defining feature→Chamberlin's point was that products in most real markets are differentiated, whether really (formulation, quality, durability, after-sales service) or only in perception (brand, trademark, wrapper, the location of the shop). Differentiation is what gives each seller a partial monopoly over its own variety.

(d) Selling costs — Chamberlin's own contribution→He separated production costs, incurred to make the product, from selling costs — advertising, salesmanship, display, free samples — incurred to shift the demand curve for it. Under perfect competition the textbook figure for selling costs is zero, because an identical good sold at the ruling price cannot be advertised into a higher one.

(a) Many buyers and sellers — shared with perfect competition→Each holds so small a share that no firm's price or output decision provokes a reaction from any identifiable rival. That is what separates monopolistic competition from oligopoly, where the sellers are few and strategic interdependence is the central fact.

What the model predicts in the long run→Free entry drives profit down to normal, so the average revenue curve is tangent to the long-run average cost curve — but the tangency lies to the left of that curve's minimum. The gap is the famous excess capacity of monopolistic competition, and price stays above marginal cost.

Study next

The four market forms compared on a single table — number of sellers, nature of product, entry, demand curve, long-run profitChamberlin's tangency solution and the excess-capacity theoremPrice discrimination and its three degrees, the natural follow-up to a downward-sloping firm demand curveOligopoly models — the kinked demand curve, cartels and price leadershipSelling costs versus production costs, and the debate over whether advertising is informative or persuasive

Common traps

Marking the defining feature — differentiation — because the question asked which feature is not present, and the eye went to the most characteristic statement.
Treating a large number of sellers as unique to perfect competition; monopolistic competition shares it, and only the nature of the product separates the two.
Assuming monopolistic competition means supernormal profit; free entry drives long-run profit to the normal level exactly as in perfect competition.
Confusing product differentiation with price discrimination — the first is about the product, the second about charging different buyers different prices for the same product.

Market structure appears in EPFO economics as a one-line definitional item, usually in one of two shapes: a feature to be sorted to the right market form, as here, or a real market to be classified (a village vegetable mandi, a branded toothpaste market, the electricity distribution licence in a city). Both are answered by running the same three tests — how many sellers, is the product identical or distinguishable, is entry free. Long-run equilibrium and the excess-capacity result are the natural next step and are worth being able to draw.

Related PYQs

No directly related past PYQ was found.

Practice

practice — not a real PYQ
In the long-run equilibrium of a firm under monopolistic competition, which one of the following is true?
- (a)Price equals marginal cost and the firm produces at the minimum of its average cost curve
- (b)The average revenue curve is tangent to the long-run average cost curve and the firm earns only normal profit
- (c)The firm continues to earn supernormal profit because its product is differentiated
- (d)The firm faces a perfectly elastic demand curve
Answer(b) The average revenue curve is tangent to the long-run average cost curve and the firm earns only normal profit
practice — not a real PYQ
The distinction between production costs and selling costs was introduced into price theory by
- (a)Alfred Marshall
- (b)A. C. Pigou
- (c)Edward H. Chamberlin
- (d)Paul Samuelson
Answer(c) Edward H. Chamberlin

Why