Monopolistic competition

What are the characteristics of monopolistic competition?

• Large number of relatively small firms

• very low barriers to entry 

• SR supernormal profits only 

What is product differentiation?

Methods that firms use to make their products stand out from the competition, give the firm a USP.

What are some examples of product differentiation?

Branding, advertising, design differences, quality etc. 

How does the market operate? 

Firms are price makers in the SR, they have control because their product is unique in some way. 

However, in the LR as firms can easily enter the market supernormal profits do not last very long. 

Why is it called monopolistic competition?

Firms are effectively like a monopolist of their own brand, but only as far as their brand image and loyalty will stretch.

What is an example of monopolistic competition?

In the airline industry there are MANY firms, meaning there is significant product differentiation e.g. on board services and branding.

Virgin was the first airline to introduce seat beds making them a monopoly provider but eventually other firms catch on causing MR and AR firms to shift left.

What does a loss look like in the short run?

Losses will lead to the most inefficient firms making a loss and leaving the market, so the demand curve will shift right.

What will a loss look like in the long run?

The market will be in equilibrium when there is only a normal profit being made. Any output other than profit maximising output will make a loss.