3.4.3 Monopolistic competition

Question 1

What are the conditions for monopolistic competition?

Answer 1

• There is product differentiation – either due to advertising or because of real differences between products.
• There are no (or very low) barriers to entry.

Question 2

[Monopolistic competition]

What does it mean if there is product differentiation?

Answer 2

• This means the seller has some degree of price making powers.
• So each seller’s demand curve slopes downwards.
• But the smaller the product differences, the more price elastic the demand for each product will be.

Question 3

[Monopolistic competition]

What does it mean if there are no/low barriers to entry?

Answer 3

This means that if very high supernormal profits are earned, new entrants can join the industry fairly easily.

Question 4

Can firms in monopolistic competition earn supernormal profit?

Answer 4

In the short term: Yes
In the long term: No

Question 5

Where is the profit maximising point on a diagram?

Answer 5

MC = MR

Question 6

Is there productive efficiency with monopolsitic competition?

Answer 6

No, because they are not producing at the lowest point on the AC curve.

Question 7

Are monopolsitically competitive markets more efficient than monopolies?

Answer 7

More efficient

Question 8

Why do firms under monopolistic competition not operate on the AC curve?

Answer 8

Firms need to spend money on differentiating their production (e.g. by advertising) and creating brand loyalty.

Question 9

Are prices under monopolistic competition lower than prices under a monopoly?

Answer 9

Yes - they tend to be lower.

Question 10

Is there dynamic efficiency under monopolistic competition?

Answer 10

The lack of barriers to entry mean that firms are unlikely to invest money on new innovation, so there’s likely to be less dynamic efficiency in a monopolistically competitive market.