Monopolistic Competition (3.4.3)

Question 1

What is Monopolistic Competition? + e.g.

Answer 1

A market structure in which there are many firms offering a similar product but with some product differentiation e.g. nail salons

Question 2

Is Monopolistic Competition a form of imperfect or perfect Competition?

Answer 2

Imperfect

Question 3

What are the characteristics of Monopolistic competition?

Answer 3

1. There are a large number of small firms - Act independently in the market
2. Low barriers to entry and exit from the industry- Firms can start-up and leave industry with relative ease which increases levels of competition
3. Products are slightly differentiated- Structure exists as customers have different desires. Relatively homogenous product can be differentiated
4. Low degree of market power and price setting ability

Question 4

Does a Monopolistic Firm have any market power?

Answer 4

Firm does have some market power and is able to influence the price and quantity.

Question 5

Are Monopolistic Firms Price Makers or Price Takers?

Answer 5

Firm is price maker due to the fact that they have a differentiated product that is desirable by certain consumers

Question 6

Can Monopolistic firms make supernormal profit in the short-term?

Answer 6

They are able to make supernormal profit in the short-term as the firm has some market power due to the level of product differentiation that exists

Question 7

Can Monopolistic firms make supernormal profit in the long-term?

Answer 7

Only in position to make normal profit as this is due to the inability to defend against new competitors who enter the market and copy the products of existing sellers. Firms will attempt to find new ways to differentiate their product to prolong the period of supernormal profit. New entrants are attracted to the industry due to supernormal profits and number of sellers increases and because low barriers of entry its easy to join the industry

Question 8

What type of efficiency are Monopolistic Firms?

Answer 8

Dynamically efficient since there are differentiated products and so know that innovative products will give them and edge over their competitors and enable them to make supernormal profits in the short run