Monopolistic Competition

Definition
Monopolistic competition refers to a
market situation in which there are either
many producers producing goods which are
close substitutes to one another or the
product is differentiated.
According to Joe S. Bain, “Monopolistic
competition is found in the industry where
there are large number of small sellers selling
differentiated but close substitute products.”
Examples:
Furniture
Restaurants
Service stations
Grocery stores
Gas stations
Clothing stores
Private schools
Health clubs
Hairdressers
Medical care etc…
 Characteristics of
Monopolistic Competition
Many Sellers
 There are many firms competing for the same group of
customers.
 Product examples include books, CDs, movies, computer games,
restaurants, piano lessons, cookies, furniture, etc.

 So, the decisions made by one firm do not affect other firms
in any perceptible way.
 Characteristics:
Product Differentiation
 Each firm produces a product that is at least slightly different
from those of other firms. As a result,
 Rather than being a price taker, each firm faces a downward-
sloping demand curve

Price Demand

Quantity
 Characteristics:

Free Entry or Exit:

 Firms can enter or exit the market without any difficulty. As
a result,
 The number of firms in the market adjusts until economic
profits are zero.
 EQUILIBRIUM OF A FIRM UNDER
MONOPLASTIC COMPETITION
 SHORT RUN EQUILIBRIUM: These profits will
not last.
(a) Firm Makes Profit Short-run
economic profits
MC encourage new
firms to enter the
Price ATC market.
This reduces the
demand faced by
firms already in the
market (incumbent
Price firms)
Incumbent firms’
Average demand curves
total cost shift to the left.
Profit Demand
Their profits fall…
MR

0 Profit- Quantity
maximizing
quantity 6
 Monopolistic Competitors in the Short Run
These losses will
(b) Firm Makes Losses not last.
Price Losses force some
incumbent firms to
MC exit the market.
ATC This will increase
Losses
the demand faced
by the remaining
firms
Average Their demand
total cost curves will shift to
the right.
Price Their losses will
shrink
In the long run,
profits will be zero!

MR Demand

0 Loss- Quantity
minimizing
quantity 7
 LMC
P
Long-Run Equilibrium: A
Monopolistically Competitive LAC

Firm(normal profit)
P=LAC

Pe

AR
Q
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qe MR
Any Questions?

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