MONOPOLISTIC COMPETITION - is a type of imperfect competition such that competing producers sell

products that are differentiated from one another as good but not
perfect substitutes.
- combination of perfect competition (all firms supply an identical
standardized product) and monopoly (single firm sells a unique product)

Short Run – firms behave like monopolies; using market power to generate profit
Long Run – market becomes more like a perfectly competitive; firms cannot gain economic
profit

3 Features of Monopolistic Competition

1. Product Differentiation -
- close but imperfect substitutes
 goods perform the same basic functions but
have differences in qualities such as branding,
quality, location, appearance, type, style
- highly substitutable products with slight difference
- competing products are close substitutes, demand is
relatively elastic – slightly downward sloping demand
curve
 relatively small changes in price cause relatively
large changes in quantity
 Quantity is very responsive to Price

2. Many firms - many firms in each MC product group and many firms on the side lines
prepared to enter the market
 collection of similar products
- the fact that there are “many firms” gives each MC firm the freedom
to set prices without engaging in strategic decision making regarding the
prices of other firms and each firm’s actions have a negligible impact on
the market
 for ex. a firm could cut prices and increase sales without
fear that its actions will prompt responses from
competitors

3. Free entry and exit in the long run – there are numerous firms waiting to enter the
market each with its own “unique” product or
in pursuit of positive profits and any firm unable
to cover its cost can leave the market