(a) Explain the adjustment process of a monopolistically competitive firm transitioning from the short-run to the long-run. (b) Explain what is meant by the ‘advertising trap’ for a monopolistically competitive firm.
(a) Explain the adjustment process of a
(b) Explain what is meant by the ‘advertising trap’ for a monopolistically competitive firm.
The market structure in which there are a large number of buyers and sellers of differentiated products is known as a monopolistic competitive market. This means that firms compete for market share by changing the physical or qualitative characteristics of their products. In a monopolistic competitive market, there are few barriers to entry, thus new firms can quickly enter and existing firms can go if business is not lucrative. In this situation, firms are price makers, and they incur selling costs in the form of advertising and delivering samples in order to influence customer demand patterns.
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