CHAPTER 8

MONOPOLISTIC COMPETITION
Monopolistic competition

Is a type of market structure characterized by (1)

many small firms (2) differentiated product (3) easy
market entry and exit.
Many Small Sellers

Is comprised of a large number of

independently acting firms and buyer.
Differentiated Product

Monopolistically competitive market are

differentiated from each in one or more
respects.
Product Differentiation

Is a process of creating real or apparent

differences between goods and services sold in
the market.
Easy Entry and Exit

There are no barriers to entry preventing

new firms entering the market or obstacles in
the way of existing firms leaving the market.
Market for Haircut
What can this hairdresser do to increase sales back
to the old level?
Marketing Promotion

Is one key to get sales back. Many service

providers advertise that their "customer service" is
much better than their competitors.

 Some salons offer loyalty programs for

customers to enjoy discount perks.
 Monopolistically competitive markets can be found
in a wide range of industries. One major area is in
garments retailing, and other small businesses. Many
service markets are monopolistically competitive;
consider electricians, plumbers, hairdressers, dress
shops.
Arguments for advertisement

Some of the arguments in favor of advertising are

the following:
 advertising is informative;
 advertising increases sales and permits economies
of scale;
 advertising increases sales and contributes to
economic growth;
 advertising supports the media; and
 advertising increases competition and lower
prices.
Arguments against advertisement

Some of the arguments against advertising are the

following:

 advertising is not informative but competitive;

 the economies of scale are illusory;
 advertising raises the cost curve;
 advertisers may use their influence to bias the
media;
 advertising is used as an entry barrier; and
 advertising is not a productive activity.
Product Differentation and Demand Elasticity

The demand curve of a firm in monopolistic

competition market structure is downward sloping
because of the preference of customers for the
features of the differentiated products. However,
because there arr many close (if not perfect)
substitutes readily available, the demand is higly
elastic . Graphically means that the demand in
monopolistic competition is flatter than in monopoly.
Perfectly competitive firms face a perfectly elastic
demand curve for their product because all firms
in their industry produce identical product.
In contrast, a monopolistic competitor face a
downward-sloping firm demand curve. This type
of curve is based on the notion that thd firm can
change its price without losing all of its business
because buyers do not see any perfect
substitute.
A monopolistic competitor, in short run, is like
monopolist becaise it is the only producer of its
unique product.
But unlike a monopoly, the monopolistically
competitive firm faces competition from other
firms producing good substitutes for its product