Monopolistic Competition

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Monopolistic Competition Monopolistic Competition is a market structure which combines elements of monopoly and competitive markets. Essentially a monopolistic competitive market is one with freedom of entry and exit, but firms are able to differentiate their products. Therefore, they have an inelastic demand curve and so they can set prices. However, because there is freedom of entry, supernormal profits will encourage more firms to enter the market leading to normal profits in the long term. * A monopolistic competitive industry has the following features: * Product differentiation * Many firms * Free entry and exit in the long run * Independent decision making * Market Power * Buyers and Sellers do not…show more content…
That is, the MC firm's profit maximizing output is less than the output associated with minimum average cost. Both a PC and MC firm will operate at a point where demand or price equals average cost. For a PC firm this equilibrium condition occurs where the perfectly elastic demand curve equals minimum average cost. A MC firm’s demand curve is not flat but is downward sloping. Thus in the long run the demand curve will be tangential to the long run average cost curve at a point to the left of its minimum. The result is excess capacity. Problems: While monopolistically competitive firms are inefficient, it is usually the case that the costs of regulating prices for every product that is sold in monopolistic competition far exceed the benefits of such regulation.[citation needed] However, it would not have to regulate every product and every firm just the most important ones. That alone would be an improvement on the current situation. A monopolistically competitive firm might be said to be marginally inefficient because the firm produces at an output where average total cost is not a minimum. A monopolistically competitive market is productively inefficient market structure because marginal cost is less than price in the long run. However, monopolistically competitive markets are allocatively efficient. Product differentiation increases total utility by better meeting people's wants than homogenous products in a perfectly competitive
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