Monopolistic Competition

and monopoly. with a single firm. with an infinite number of firms.Market Structure • Perfect competition. • Monopolistic competition is a market structure in which there are many firms selling differentiated products • There is no incentive for firms to cooperate in ways that reduce competition . are polar opposites • Monopolistic competition and oligopoly lie between these two extremes.

Ease of entry of new firms in the long run because there are no significant barriers to entry Firms compete by selling differentiated products that are highly substitutable for one another but not perfect substitutes. Product differentiation where the goods that are sold aren’t homogenous 3. Many sellers each satisfying a small but not microscopic share of market 2. The cross-price elasticities of demand are large but not infinite. 16-3 .Characteristics of Monopolistic Competition 1.

firms can enter the industry quite freely in long run – Difference: sells differentiated products • Monopoly element: due to differentiated product.Features • A blend of competition and monopoly • Competitive element: many sellers. each firm enjoys some market power – Difference: Market power is limited by existence of close substitutes – entry is rather easy .

but not identical • Toothpaste.Differentiated Product • Similar. • Differentiation can be real (breakfast cereals) • Differentiation can be non-real (aspirin) • Rivalry among firms take place in forms of: – Product quality – Services . detergents etc.

Monopolistic Competitor • Chamberlin called the sellers of differentiated products as ‘product group’ • We cannot derive ‘industry’ supply and demand curves as we do not have a single price. we mean the market share of the firm . but a cluster of prices • By demand facing the firm.

Output. and Profit of a Monopolistic Competitor Like a monopoly • The monopolistic competitive firm has some monopoly power so the firm faces a downward sloping demand curve • Marginal revenue is below price • At profit maximizing output. Price. marginal cost will be less than price Like a perfect competitor. • zero economic profits exist in the long run 16-7 .

P= AVCmin is the shutdown point . it tries to minimise loss.Short Run Equilibrium It is just the same as the Monopolist’s short run equilibrium The firm may just break even. or may have profits or losses If it has losses.

Long Run Equilibrium D1 D2 LMC LAC P* D1 D2 MR q* MR = LMC as well as P = LAC to ensure there is no profit no loss .

Sustainability Strategy • Product variation • Advertising – To make the product more price inelastic .

11. Suppose the city eliminates restrictions and new stores enter. Predict the equilibrium number of book stores. . 20 and average cost of Rs.Problem Your city has a single bookstore which sells books at a price of Rs. Each additional book store decreases the price of book by Rs. 2 and increases the average cost by Re 1.