Monopolistic competition: market structure in which many sellers
each produce similar, but slightly differentiated, products.
Much of the world’s output of services produced monopolistically
competitive industries.
Examples…
•
•
•
•
•
Doctors
Restaurants
Dentists
Hotels and guesthouses
Hairdressers
•
•
•
•
•
Lawyers
Corner shops
Accountants
Architects
Fast-food outlets
Characteristics
of
monopolistic
competition
• Product differentiation: the act of making a product that is slightly
different to the product of a competing firm.
• Differs from perfect comp. in that many firms produce a
differentiated product.
• Goods/services good substitutes, but differentiated.
• Homogeneous or heterogeneous – consumers decide!
The greater the real or perceived
differentiation, the less price
elastic demand becomes.
• Many sellers, BUT each has monopoly of its own differentiated
product & therefore some market power.
• Eg – dentist that’s great with children
• Ability to increase price (use market power) limited
due to substitutes.
• Therefore, face a downward-sloping demand curve.
• Demand more price elastic (flatter) than for
oligopolistic firms, due to increased consumer choice.
• Implies ability to make economic profits (or losses)
only in short run.
• In the long run only normal profits possible.
• Firms do not have perfect information about consumers’ or other
firms behaviour.
Homogenous products
Horizontal demand curve
Differentiated products
Downward facing demand
curve
ProfitDownward-sloping
is maximised
where
= MCaxis &
MR intersects
halfway between
D the
=MR
ARprice
Economic profit
per
unit
=
AR
AC
at
Q
.
1
1; Q1(AR)
demand
PED
>Pmonopoly
= MC
&(substitutes).
AR
=elastic
AC.
Good example
with
figures
on
page 181 of text
Demand
falls
DMR
becomes
more
price
Economic
profits
eliminated
NoAR
further
entry
into
the
industry.
(more
close
substitutes)
curve
AC curve.
book…
D &tangent
MR
shifttoleft.
SHORT RUN EQUILIBRIUM
LONG RUN EQUILIBRIUM
• Each firm has a monopoly of its differentiated product.
• BUT… face strong competition from many other firms in the
industry.
• All firms try to increase demand make economic profits.
• BUT… free entry ensures that normal profits made in long
run.