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
