Monopolistic competition

• Monopolistic competition is a real-world market structure that combines characteristics of a competitive market and monopoly.
• In a monopolistic competition, there are many buyers and sellers, each firm is selling slightly differentiated goods, and firms are price makers who can set their own prices but only slightly due to the availability of good substitutes.
• Monopolistic competition markets have price elastic demand curves, low barriers to entry and exit, good information of market conditions, and firms are profit maximizers who produce where MC is equal to MR.
• Examples of monopolistically competitive markets include clothing markets, taxis, fast food restaurants, hairdressers and salons, bars and nightclubs.
• In the short run, firms in monopolistic competition behave similarly to firms in a monopoly, with downward sloping revenue curves, average cost curve, and marginal cost intersecting at the lowest point.
• Firms can enter the market and compete with established firms, shifting the demand for individual firms in the market to the left until average revenue is equal to average cost, resulting in normal profit.
• The theory of how the demand for individual firms in the market shifts to the left as new firms enter the market is represented on a diagram by a downward slope of the average revenue curve.
• The long-run position in monopolistic competition is characterized by average revenue equal to average cost, indicating normal profit.
• Monopolistic competition is inefficient as prices are greater than cost, output is restricted, and choices are restricted.
• Productive efficiency is not attained in monopolistic competition as the minimum point on the average cost curve is not reached.
• In the long run, profits in monopolistic competition markets will not last as new firms enter the market attracted by the supernormal profit.