Monopolistic Competition 3.4.3

What are 3 characteristics of monopolistic competition?

• Product differentiation: firms sell differentiated products that have some unique characteristics but are still substitutes for each other.

• Many firms: there are many firms in the market but not as many as in perfect competition.

• Easy entry and exit: It’s still relatively easy for firms to enter and exit the market.

What makes monopolistic competition more realistic than perfect competition?

It uses differentiated products which means that businesses have had some price-setting power. (downward sloping AR but also high XED).

How can products be differentiated?

• Product quality- ingredients

• Product performance- processing speed, reliability

• Branding- perceived differentiation & packaging

• Functionality- multipurpose/ carbon-impact

• Provenance of product- where it’s from- environmental footprint during manufacturing/ service

• Quality of after-sales service- availability of replacement parts

What are some examples of monopolistic competition?

• Artisan bakeries

• Craft beer manufacturers

• Sandwich bars and coffee shops

• Hairdressing salons

• Dry-cleaners & launderettes

• Bars & night clubs.

What are 3 short run dynamics in monopolistic competition?

• Many producers and many consumers- the industry concentration ratio is low.

• Non-price competition is strong and lots of consumer switching takes place.

• Barriers to entry and exit are low- allows producers to respond to profit signals.

What is the effect of having supernormal profits?

They attract new suppliers with differentiated products into the market. This dilutes the market share of existing products causing an inward shift of AR and MR.