Monopolistic Competition

Monopolistic Competition

1. Conditions

   • Many producers
   • Price Makers
   • Free entry/Exit
   • Many Substitutes
     • Product Differentiations
       • Physical Differences
         • Size, weight, color, taste, texture, etc
       • Location
         • The number and variety of locations where a product is available are other ways of differentiation - spatial differentiation
       • Services
         • Deliveries, well-trained sales staff, online support, toll-free help, money-back guarantrees
   • Marketing/Sales Production

2. Demand Curve - Downward Slope

   • More elastic than a monopolist's demand but less than a perfect competitors

3. Productive Efficiency is P does not Equal Minimum ATC

4. Allocative efficiency is P does not equal MC

5. Break Even if ATC = D

6. Short Run

   • Short Run Profit, where MR=MC and ATC and AVC are below the demand
   • IF ATC and AVC are above Demand, SHUT DOWN
   • Loss Minimizing short-run loss, when Demand curve price is lower then ATC but higher than AVC

7. Long Run

   • Because market entry is easy, monopolistically competitive firms earn zero economic profit in the long run
   • Monopolistic Competition is like monopoly in the sense that firms in each of the two markets face demand curves that slope downward. Monopolistic competition is like perfect competition in the sense that easy entry and exit eliminate economic profit or economic loss in the long run.