Monopolistic competition

Question 1

Monopolistic competition characteristics

Answer 1

i) Many buyers and sellers in the market
ii) Slightly differentiated goods-
1. Firms are price makers(only slightly, due to other substitutes/firms)
2. Price elastic demand curve(flatter curve than monopoly’s demand curve, but steeper than perfect competition’s demand curve)- only slightly, due to other substitutes/firms
iii) Low barriers to entry/exit
iv) Good information
v) Non price competition: firms can’t raise prices significantly to raise supernormal profits
vi) Firms are profit maximisers(where MC= MR)

Question 2

What is competition based on in a monopolistically competitive market

Answer 2

Branding massively differentiates products from the eyes of consumers

Question 3

Examples of product differentiation due to branding

Answer 3

Choosing a curry house rather than Chinese food - persuaded due to branding

Question 4

Monopolistic competitive markets

Answer 4

Shoe repairs and key makers, taxi and minibus companies, sandwich bars and coffee stores

Question 5

Efficiency of monopolistically competitive markets(compared to a monopoly)

Answer 5

Intense competition between suppliers means demand is likely to be price elastic(PED>1), meaning prices may move closer to marginal cost, and therefore prices for consumers will be lower in contrast to a monopoly(improvement in allocative efficiency of scarce resources).

Question 6

What does non-price competition lead to?

Answer 6

Brand loyalty, which benefits suppliers and consumers - consumers associate branding with quality

Question 7

Lack of efficiency(monopolistically competitive markets)

Answer 7

However, firms in monopolistic competition still have pricing power since AR and MR are downward sloping(selling differentiated products). The saturation of many differentiated products in monopolistically competitive markets may also lead to a loss of productive efficiency, as firms are unable to fully exploit economies of scale in the long run.