Monopolistic competition

Examples of Monopolistic competition in the following topics:

• Defining Monopolistic Competition

  • Unlike in perfect competition, firms that are monopolistically competitive maintain spare capacity.
  • Models of monopolistic competition are often used to model industries.
  • Monopolistic competition is different from a monopoly.
  • Markets that have monopolistic competition are inefficient for two reasons.
  • In a monopolistic competitive market, the demand curve is downward sloping.

• Efficiency of Monopolistic Competition

  • Monopolistic competitive markets are never efficient in any economic sense of the term.
  • In terms of economic efficiency, firms that are in monopolistically competitive markets behave similarly as monopolistic firms.
  • Again, since a good's price in a monopolistic competitive market always exceeds its marginal cost, the market can never be allocatively efficient.
  • Monopolistic competition creates deadweight loss and inefficiency, as represented by the yellow triangle.
  • In the short run, the monopolistic competition market acts like a monopoly.

• Demand Curve

  • The demand curve in a monopolistic competitive market slopes downward, which has several important implications for firms in this market.
  • The demand curve of a monopolistic competitive market slopes downward.
  • The demand curve for an individual firm is downward sloping in monopolistic competition, in contrast to perfect competition where the firm's individual demand curve is perfectly elastic.
  • Monopolistically competitive firms maximize their profit when they produce at a level where its marginal costs equals its marginal revenues.
  • Explain how the shape of the demand curve affects the firms that exist in a market with monopolistic competition

• Long Run Outcome of Monopolistic Competition

  • In the long run, firms in monopolistic competitive markets are highly inefficient and can only break even.
  • In the long-run, a monopolistically competitive market is inefficient.
  • Like monopolies, the suppliers in monopolistic competitive markets are price makers and will behave similarly in the long-run.
  • First, that the firms in a monopolistic competitive market will produce a surplus in the long run.
  • Explain the concept of the long run and how it applies to a firms in monopolistic competition

• Short Run Outcome of Monopolistic Competition

  • Monopolistic competitive markets can lead to significant profits in the short-run, but are inefficient.
  • In the short run, a monopolistically competitive market is inefficient.
  • Like monopolies, the suppliers in monopolistic competitive markets are price makers and will behave similarly in the short-run.
  • Since monopolistically competitive firms have market power, they will produce less and charge more than a firm would under perfect competition.
  • Examine the concept of the short run and how it applies to firms in a monopolistic competition

• Monopolistic Competition Compared to Perfect Competition

  • The key difference between perfectly competitive markets and monopolistically competitive ones is efficiency.
  • Perfect competition and monopolistic competition are two types of economic markets.
  • One of the key similarities that perfectly competitive and monopolistically competitive markets share is elasticity of demand in the long-run.
  • But in monopolistically competitive markets the products are highly differentiated.
  • In a monopolistic competitive market there are few barriers to entry and exit, but still more than in a perfectly competitive market.

• Imperfect Competition and Monopolistic Competition

  • The terms "monopolistic competition" and "imperfect competition" originally were basically the same even though there were subtle differences.
  • In this usage monopolistically competitive and oligopolistic markets are considered imperfect.
  • The conditions of entry and exit to and from a monopolistically competitive market are similar to the purely competitive market; there are no major BTE.
  • In the long run, above normal profits will attract the entry of firms into monopolistic competition.
  • The results of long run equilibrium in a monopolistically competitive market are shown in Figure VIII.5.

• Advertising and Brand Management in Monopolistic Competition

  • Advertising and branding help firms in monopolistic competitive markets differentiate their products from those of their competitors.
  • One of the characteristics of a monopolistic competitive market is that each firm must differentiate its products.
  • Reputation among consumers is important to a monopolistically competitive firm because it is arguably the best way to differentiate itself from its competitors.

• Definition of Perfect Competition

  • Monopolists are price makers.
  • Monopolistic competition: A market structure in which there is a large number of firms, each having a small portion of the market share and slightly differentiated products.
  • Agriculture comes close to being perfectly competitive.
  • Perfect competition leads to the Pareto-efficient allocation of economic resources.
  • However, in practice, very few industries can be described as perfectly competitive.

• Monopoly Production Decision

  • A pure monopoly has the same economic goal of perfectly competitive companies - to maximize profit.
  • Nonetheless, a pure monopoly can – unlike a firm in a competitive market – alter the market price for its own convenience: a decrease of production results in a higher price.
  • Like non-monopolies, monopolists will produce the at the quantity such that marginal revenue (MR) equals marginal cost (MC).
  • However, monopolists have the ability to change the market price based on the amount they produce since they are the only source of products in the market.
  • Therefore, monopolists produce less but charge more than a firm in a competitive market .