Monopolistic competition:

The earlier parts (Perfect Competition) and (Monopoly) dealt with two 'extreme' cases of market structure. In reality, there are hardly few markets, which fit into such kinds of framework. Therefore, in the late 1920's economists became increasingly dissatisfied with the use of these market structures as analytical models of economic behaviour. The assumptions of perfect competition, mainly the assumption of homogenous products, did not resemble the real word. Sraffa, Chamberlin and Joan Robinson worked individually to get some alternatives to fit into the real word. The revolutionary book Chamberlin introduced a new market structure with the flavour of both competition and imperfection. He called this new market structure monopolistic competition.  

Monopoly and perfect competition are extreme forms of market and do not resemble with reality. Chamberlin clubbed these two market structures together and generated the concept of monopolistic competition. The short-run and long-run equilibrium under monopolistic competition differ considerably from those of monopoly and perfect competition. In short-run there is excess profit and in the long-run that is wiped out as new firms enter the market. Most interestingly, under this market structure one could see that firms do not operate at optimal plant size. This has huge significance to optimal use of constrained resources.