Monopolistic Competition

Question 1

What are the features of a monopolistic competition?

Answer 1

• many producers and consumers - industry concentration ratio is low
• non-price differences (e.g. designs, advertising, furniture, etc) - product differentiation - plenty of consumer switching
• some control over the price, but price elasticity of demand is high
• low barriers to entry and exit

Question 2

What’s some examples of monopolistic competition?

Answer 2

Coffee shops, hairdressers, bars and pubs, nightclubs, etc.

Question 3

What’s the efficiency of monopolistic competition?

Answer 3

• prices are above marginal costs in short term - meaning the equilibrium is not allocatively efficient
• they do not operate at the lowest point on the AC curve, meaning they are productively inefficient, unable to exploit fully economies of scale, causing average costs to be higher than if less firms and products were in the market
• spending wasted on marketing and advertising, not R&D, so not dynamically inefficient. It is an inefficient use of scarce resources.