Monopolistic Competition Flashcards
What is monopolistic competition?
A more realistic view of competition as it does not assume perfect market conditions
What are the 6 conditions for monopolistic competition?
- product differentiation
- many firms
- freedom of entry and exit
- some monopoly power
- some degree of market power
- buyers and sellers don’t have perfect information
Can supernormal profits be earned in monopolistic competition?
Yes but only in the short run and they are low due to the competition in the market already
What type of profits are earned in the long run and why?
Only normal profits are earned in the long run due to there being no/ low barriers to entry
How do you show monopolistic competition in the long run on a diagram (how does it differ from a monopoly diagram)
The AR curve will not be very inelastic but neither will it be perfectly elastic. The AC curve will sit on the AR curve showing normal profit
Why won’t a change in price lead to zero demand?
Because there is product differentiation so the good will have some loyalty
Is monopolistic competition statically efficient?
No it is not allocatively efficient (AR=MC) or productively efficient (AC=MC) and there is a deadweight loss
Is monopolistic competition dynamically efficient?
No because they only earn normal profit although they do have the incentive to improve their product due to competition
If monopolistic competition isn’t dynamically efficient then how do they product differentiate?
Monopolistically competitive firms use branding to make their product seem unique, branding is wasteful expenditure
Are monopolistic firms very allocatively inefficient?
No they are not because the market has many substitutes so if a firm doesn’t meet demands they’ll lose customers
Are monopolistic firms very productively inefficient?
No because the market has lots of price competition so they have to be near productive efficiency
Should governments intervene in a monopolistic market?
No because although they have inefficiencies these are not very large therefore the risk of government failure is greater
