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Monopolistic

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Kuroko Haha
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0% found this document useful (0 votes)
12 views13 pages

Monopolistic

Uploaded by

Kuroko Haha
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
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Monopolistic Competition

Characteristics of a monopolistically
competitive market
• Many buyers and sellers
• Differentiated products
• Easy entry and exit
Relationship to other market models

• Monopolistic competition is similar to perfect


competition in that:
• There are many buyers and sellers
• There are no barriers to entry or exit
• Monopolistic competition is similar to monopoly in
that:
• Each firm is the sole producer of a particular product
(although there are close substitutes)
• The firm faces a downward sloping demand curve for its
product
Demand curve facing a
monopolistically competitive firm
The firm’s demand curve and entry and exit

• As firms enter a
monopolistically
competitive
market, the
demand facing a
typical firm
declines and
becomes more
elastic.
Short-run equilibrium in a
monopolistically competitive industry

• Economic profits lead to entry


and a reduction in the
demand facing a typical firm.
Long-run equilibrium in a
monopolistically competitive industry

• Entry continues
until economic
profit equals
zero for a typical
firm.
• This equilibrium
is often referred
to as a
“tangency
equilibrium.”
Short-run equilibrium with economic losses
Long-run equilibrium
Monopolistic competition vs. perfect
competition

 A monopolistically
competitive firm,
in the long run,
has “excess
capacity” – (i.e.,
it produces a
level of output
that is below the
least-cost level).
 This is a cost of
product variety.
Monopolistic competition and efficiency

• As the number of firms rises, a monopolistically competitive


firm’s demand curve becomes more elastic.

• As the number of firms in a market expands, the market


approaches a perfectly competitive market.

• Thus, economic inefficiency may be smaller when there is a


large number of firms in a monopolistically competitive
market.
Product differentiation and advertising

• Monopolistically competitive firms may receive short-run economic


profit from successful product differentiation and advertising.
• These profits are, however, expected to disappear in the long run as
other firms copy successful innovations.
Location decisions

• Monopolistically competitive firms often locate near each other to


appeal to the “median” customer in a geographical region. (e.g., fast
food restaurants and car dealerships)

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