3.4.3 Monopolistic Competition

Question 1

Characteristics of monopolistic competition?

Answer 1

• Many small firms - low concentration ratio
• Similar goods, slightly differentiated through quality, branding or advertising - product differentiation
• Low barriers to entry and exit
• Firms can set price to an extent because they’re producing goods that are slightly different to their rivals’.

Question 2

Product differentiation in monopolistic competition?

Answer 2

• Build brand loyalty = some influence over price = downwards-sloping demand curve
• Heavy advertising
• Substitutes available = demand price elastic (but not perfectly elastic like in perf. competition)

Question 3

Freedom of entry in monopolistic competition?

Answer 3

• Very low barriers to entry = firms can join market if SN profits being made

Distinguishes monopolistic from monopoly w/ high barriers to entry

Question 4

Low concentration in monopolistic competition?

Answer 4

• Concentration ratio in industry tends to be low as there are many firms operating in the market = price change by one firm will have negligible effects on demand for rival products

Different from oligopoly where few firms interact with each other strategically

Question 5

Types of efficiency achieved in monpolistic competition

Answer 5

• Neither productive nor allocative

Question 6

Examples of monopolistic competition?

Answer 6

• Taxis
• Food outlets (chicken shops)