3.4.3 Monopolistic Competition

Question 1

What is Monopolisitc competition?

Answer 1

Monopolistic competition is a market structure where many firms sell similar but differentiated products, and each firm has some price-making power.

They are PRICE MAKERS.

Question 2

Characteristics of Monopolostic competition?

Answer 2

1. Large Number of Firms
2. Firms are often small
3. Low barriers to entry / exit
4. Products are slightly differentiated
5. Low degree of market power and some price setting ability

Question 3

For monopolistic firms - what does the profit landscape look like?

Answer 3

Almost like perfect comp - in short run they can make SNP.

But low bariers to entry means firms enter and copy the product leading to a long run equlibrium position where they make normal profit.

Question 4

How might monopolisitc firms extend SNP?

Answer 4

Firms will attempt to find new ways to differentiate their product to prolong the period of supernormal profit, e.g. a barber shop may add in a pool table and beer fridge for their customers to enjoy, thus making them different from the competition (for a period of time until others adapt)