4.1.5.4 - Monopolistic Competition

Charcateristics of Monopolistic Competition:

• Many firms

• Differentiated products

• Few barriers to entry

• Price-makers

Diagram of Monopolistic Competition in the Long Run

If in short run, monopolistic competition is making supernormal profit, what will happen in long-run.

• In short-run, firms make supernormal profits.

• As no barriers to entry, more firms enter this market in long-run

• MR and AR become more elastic as more substitutes available

• MR and AR shift to left as they lose customers to other producers.

• Process stops when each firm only makes normal profits (AR=AC)

Is monopolistic competition efficient in long-run?

• Not allocatively

• Not productively

Real World Examples of Monopolistic Comp

• Restaurants

• Barbers

Monopolistic Comp is subject to Non-Price Competition

• Quality of product

• Branding

• Customer Service

• Location

• Advertising

• Range of products