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Monopolistic Competition
Monopolistic Competition
https://ebrary.net/1522/economics/monopolistic_competition 2/5
Furniture 21 27 37 49
Retail
Convenience stores
16 20 23 26
Hardware stores 20 23 27 30
Limited-service restaurants 8 11 17 21
Source : U.S. Bureau of the Census/American FactFinder, “Concentration Ratios: Share of Shipments
Accounted for by the 4, 8, 20, and 50 Largest Companies for Industries: 2007,” 2007 Economic
Census
return policy or conveniently situated stores, factory outlets, or service centers. Product
differentiation gives these firms some market power and thus, some control over the product's
price.
The traditional textbook model states that monopolistically competitive firms earn zero economic
profits in the long run mainly because competitors are free to enter this type of industry and drive
prices down. Yet this model assumes that these firms produce the same tired products with the
same production methods as in the past. Firms in monopolistically competitive industries can
innovate, however, and reinvent themselves by developing new and better products, expanding
product lines, and lowering production costs. Consider recent innovations made by profitable
limited-service restaurants such as health-conscious menu items, drive-through windows, and
delivery services. Through innovation, monopolistically competitive firms can maintain healthy
profits for a very long time.