Monopolistic Competition Flashcards
What is monopolistic competition a form of
Imperfect competition
Assumptions of monopolistic competition
- many consumers and producers
- consumers are aware that there are non-price differences among products
- firms are price takers
- low barriers to entry and exit
Examples of monopolistic competition
Uber
Sandwich bars and coffee shops
Is there product differentiation
Yes - businesses have some control over their products
Demand curve
Downward-sloping (some degree of price setting power as they are selling differentiated products)
AR curve for each product
Highly price elastic - many close substitutes and cost of consumer switching is low
Barriers to entry?
No
Profits
Can be at any level in the SR
Supernormal profit ?
Acts as a signal for attracting new producers with new products
LR demand curve
Shifts to the left (consumers opt to buy producers offered by new / alternative companies). Moves until tangible to the AC curve
LR equilibrium profits
Normal
In reality why might a stable equilibrium not be reached
New products some and go, some naturally do better than others (they market is in a state of constant flux)
Monopolistic competition: allocative efficiency
No - prices are above marginal cost
Monopolistic competition: productive efficiency
No - saturation of the market may lead to businesses being unable to exploit fully economies of scale - causing average costs to be higher
Critics of heavy spending on marketing and advertising
Argue that much of this spending is wasteful and an inefficient use of scarce resources
What is one of the main problems with monopolistic competition
Social costs of packaging and negative externalities (linked to monopolistic competition).
What is monopolistic competition associated with
Extensive consumer choice and innovation - good for dynamic efficiency
