Monopolistic Competition Notes

Monopolistic competition

A market structure in which many firms sell a differentiated product, entry is relatively easy, each firm has some control over its product price, and there is considerable nonprice competition.

Product differentiation

A strategy in which one firm’s product is distinguished from competing products by means of its design, related services, quality, location, or other attributes (except price).

Nonprice competition

Competition based on distinguishing one’s product by means of product differentiation and then advertising the distinguished product to consumers.

Pricing power

The ability of a firm to raise prices without substantially reducing quantity demanded; increases as demand becomes increasingly inelastic.

Four-firm concentration ratio

The percentage of total industry sales accounted for by the top four firms in an industry.

Herfindahl index

A measure of the concentration and competitiveness of an industry; calculated as the sum of the squared percentage market shares of the individual firms in the industry.

Excess capacity

Plant resources that are underused when imperfectly competitive firms produce less output than that associated with achieving minimum average total cost.