3.4.3 monopolistic competition

characteristics:

-“normal” business

-products are slightly different( still similar)-differentiated through things like quality, branding, advertising.

-imperfect knowledge about rival firms price and output decisions, but firms can identify when supernormal profits are being made.

-low barriers to entry-in the long run, companies can enter the market.

-firms can set prices to an extent-they are producing goods that are slightly different, so can set prices.

-as prices increase, demand decreases.

-aim to maximise profits

-can’t maintain supernormal profits in the long run

What is monopolistic competition?

Monopolistic competition is a market structure that combines elements of both monopoly and perfect competition.

Many Sellers

There are numerous firms in the market, each producing slightly differentiated products. These differences can be based on branding, quality, design, or other factors.

Product Differentiation

Each firm produces a product that is similar but not identical to the products of its competitors. This product differentiation allows firms to have some control over the price they charge.

Easy Entry and Exit

Firms can enter or exit the market relatively easily. There are no significant barriers to entry, such as high startup costs or government regulations.

Non price competition

Firms engage in non-price competition to attract customers. This includes advertising, product design, branding, and customer service.

limited control over price

While firms have some degree of pricing power due to product differentiation, they face competition from other firms offering similar products. As a result, they cannot significantly raise prices without losing customers.

Short run and Long run profits:

In the short run, firms may earn economic profits or incur losses. In the long run, however, economic profits tend to be eroded as new firms enter the market or existing firms adjust their products and strategies.

imperfect information

Consumers may not have perfect information about all available products, making advertising and branding important tools for firms to differentiate their products.