Monopolistic Competition Flashcards
Monopolistic Competition
Market structure combining elements of monopoly and perfect competition
Conditions for Monopolistic Competition
Larger number of producers
Differentiated products
Free entry and exit from market
Product Differentiation in Monopolisitc Competition
Firms differentiate products to gain market power
Cannot collude due to larger number of producers
Forms of Product Differentiation
Can be by style, type, location, and quality
Features of Industries with Differentiated Products
Competition among sellers being the reason quantity sold by each producer reduces
Consumers benefitting from increased product diversity
Business Strategies in Monopolistic Competition
Cost leadership (lower costs than competitors)
Product differentiation (offering products preferred over those of your competitor)
Bases of Differentiation
Comfort, quality, taste, safety, etc.
Short-Run Profit Maximization
Firms produce quantity where MR = MC
Set prices according to demand
Similar to monopolies
Impact of New Entrants
Reduce number of consumers for existing firms
Shift in demand and marginal revenue curves and, eventually, zero economic profits
Efficiency of Monopolistic Competition
Less efficient than perfect competition
Firms have excess capacity
Produce less than the output at which ATC is minimized
Comparison with Perfect Competition
Both result in zero profits in long-run
Prices are higher in monopolistic competition, and firms do not produce at minimum ATC
