3.5 monopolistic competition

conditions of monopolistic competition are

non-homogenous products (close substitutes), low/no barriers to entry, large NO of buyers and seller

firms in a monopolistically competitive market compete using

non-price competition

the fact that there are close substitutes means

the XED of goods and services is high

buyers and sellers in a monopolistically competitive market have

imperfect information

examples of monopolistic markets are

hairdressers and regional plumbers

in the SR monopolistic competition can

make supernormal profits and loss

advantages of monopolistic markets are

consumers get a wide variety of choice, the model is more realistic, sn profits produced in SR may increase dynamic efficiency through investment

disadvantages of monopolistic competition are

firms are allocatively inefficient in the SR and LR (P>MC), firms don’t fully exploit factors leaving excess capacity in the market, making them productively inefficient also never operate at bottom of AC curve, dynamic efficeincy may be limited in LR, firms have x-inefficiency

firms have x inefficiency because

they have little incentive to minimise their costs