Monopolistic Competition

monopolistic competition

a market structure in which the barriers to entry are low and many firms compete by selling differentiated products

optimal output decision for Q*

MR = MC

demand curve

downward sloping, D = P = AR

monopolistic market power

every firm has the ability to affect the price of the good or service it sells will have a MR curve below its Demand curve

P*

find Q* (MR = MC) and follow up to the demand curve

short run positive profit

new firms join the monopolistic competitive market; demand shifts left

long run for positive profit

• demand shifts left until tangent to ATC

• P* = ATC

• demand more elastic

how can monopolistically competitive firms stay successful?

differentiating products, introducing new technology to lower the cost of production, luck/chance/timing

differentiation methods

brand management, marketing, advertising

productive efficiency for monopolistic firm

no; MR=MC not at ATC minimum

allocative efficiency monopolistic firm

NO; MC does not equal D, leading to higher prices.