Monopolistic competition

Question 1

Characteristics to monopolistic market

Answer 1

• Low barriers to entry
• Lots of substitute products
• Lots of firms in the market
• Price takers but could be price makers if they establish market share

Question 2

Monopolistic competition & efficiency

Answer 2

• Price are above marginal cost
  > Meaning that the equilibrium is not allocative efficient
• Saturation of the market may lead to business being unable to exploit full economies of scale - causing average costs to be higher - therefore not productively efficient
• Critics of heavy spending on marketing and advertising argue that much of this spending is wasteful and in inefficient use of scares resources
• Debate over the social costs of packaging and negative externalities is linked to monopolistic competition
• Monopolistic competition associated with extensive consumer choice and innovation - good for dynamic efficiency

Question 3

Concentration ratio

Answer 3

• The three firm concentration rate (the three biggest)
  > 3: … (3 biggest firms + then ÷ by total market share)
• The five firm concentration ratio (the 5 biggest firms)
  > 5: … (5 biggest firms + then ÷ by total market share)
• The seven firm concentration ratio (the 7 biggest)
  > 7: … (7 biggest firms + then ÷ by total market share)