MONOPOLISTICALLY

COMPETATIVE
MARKET
Monopolistic competition is a form of
imperfect competition where many competing
producers sell products that are differentiated from
one another (that is, the products are substitutes, but,
with differences such as branding, are not exactly
alike).
In monopolistic competition firms can behave like
monopolies in the short-run, including using market
power to generate profit.
In the long-run, other firms enter the market and the
benefits of differentiation decrease with competition.
 The market becomes more like perfect competition
where firms cannot gain economic profit.
Monopolistically competitive markets have the
following characteristics:
There are many producers and many consumers in a
given market, and no business has total control over
the market price.
Consumers perceive that there are non-price
differences among the competitors' products.
There are few barriers to entry and exit.
Producers have a degree of control over price.
 A firm making profits in the short run will break even in
the long run because demand will decrease and average
total cost will increase.
This means in the long run, a monopolistically
competitive firm will make zero economic profit.
This gives the amount of influence over the market;
because of brand loyalty, it can raise its prices without
losing all of its customers.
. This means that an individual firm's demand curve is
downward sloping, in contrast to perfect competition,
which has a perfectly elastic demand schedule.
Major characteristics
There are six characteristics of monopolistic
competition (MC):
product differentiation
many firms
free entry and exit in long run
Independent decision making
Market Power
Buyers and Sellers have perfect information
Product differentiation
MC firms sell products that have real or perceived non-
price differences. However, the differences are not so great
as to eliminate goods as substitutes. Technically the cross
price elasticity of demand between goods would be
positive.
 Many firms
There are many firms in each MC product group and
many firms on the side lines prepared to enter the market.
A product group is a "collection of similar products
Each MC firm independently sets the terms of
exchange for its product.

 The firm gives no consideration to what effect its

decision may have on competitors.
Market power
MC firms have some degree of market power. Market power
means that the firm has control over the terms and
conditions of exchange.
 An MC firm can raise it prices without losing all its
customers.
 Inefficiency
There are two sources of inefficiency in the MC market
structure. First, at its optimum output the firm charges a
price that exceeds marginal costs, The MC firm maximizes
profits where MR = MC.
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 by far exceed the benefits
 The government would have to regulate all firms that
sold heterogeneous products—an impossible
proposition in a market economy
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 might be said
to be a marginally inefficient market structure because
marginal cost is less than price in the long run.[
Examples
In many U.S. markets, producers practice product
differentiation by altering the physical composition,
using special packaging, or simply claiming to have
superior products based on brand images and/or
advertising.
 Toothpastes and toilet papers are examples of
differentiated products.
BIBILOGRAPHY
Monopolistic Competition. Encyclopedia Britannica.
http://www.britannica.com/EBchecked/topic/390037/monopolistic-com
petition
Joshua Gans, Stephen King, Robin Stonecash, N. Gregory Mankiw (2003).
Principles of Economics. Thomson Learning. ISBN 0-17-011441-4. 
Goodwin, N, Nelson, J; Ackerman, F & Weissskopf, T: Microeconomics in
Context 2d ed. page 317 Sharpe 2009
^ Hirschey, M, Managerial Economics Rev. Ed, page 443. Dryden 2000.
^ a b Krugman & Wells: Microeconomics 2d ed. Worth 2009.
^ Samuelson, W & Marks, S: 379. Managerial Economics 4th ed. Wiley
2003.
^ Perloff, J: Microeconomics Theory & Applications with Calculus page
485. Pearson 2008
Colander, David C. Microeconomics 7th ed. Page 283. McGraw-Hill 2008.
Colander, David C. Microeconomics 7th ed. Page 283. McGraw-Hill 2008.
Perloff, J: Microeconomics Theory & Applications with Calculus page 483 Pearson
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 Goodwin, N, Nelson, J; Ackerman, F & Weissskopf, T: Microeconomics in Context 2d
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 Ayers, R & Collinge, R: Microeconomics pages 224-25 Pearson 2003
 Perloff, J: Microeconomics Theory & Applications with Calculus page 445. Pearson
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 Ayers, R & Collinge, R: Microeconomics page 280 Pearson 2003
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 Pindyck, R & Rubinfeld, D: Microeconomics 5th ed. page 427 Prentice-Hall 2001.
 The firm has not reached full capacity or
minimum efficient scale. Minimum efficient scale is the
level of production at which the long run average cost
curve first reaches its minimum. It is the point where the
LRATC curve "begins to bottom out." Perloff, J:
Microeconomics Theory & Applications with Calculus
pages 483-84. Pearson 2008.
 Antony Davies & Thomas Cline (2005). "A Consumer
Behavior Approach to Modeling Monopolistic
Competition". Journal of Economic Psychology 26: 797–
826. doi:10.1016/j.joep.2005.05.003