Monopolistic Competition 1.Many firms (small market share each). 2.Acting independently (no collusion). 3.Products are differentiated. a. Actual differences in products. b. Service. c. Location. d. Brand name. 4. Easy entry and exit (no barriers).

Long-run equilibrium in monopolistic competition: Price Quantity 0 D MR QMQM MC PMPM ATC

Price Quantity 0 Monopolistic competition: short-run profit. D MR QMQM MC PMPM ATC Profit

Price Quantity 0 Monopolistic competition: short-run loss. D MR QMQM MC PMPM ATC Loss

Why do monopolistically competitive firms advertise? 1. To differentiate their product. 2. To increase consumer preference for their product. a. Increases demand. b. Makes demand less elastic.

Price Quantity 0 Why do monopolistically competitive firms advertise? To increase demand. D MR QMQM MC PMPM ATC

Price Quantity 0 D MR QMQM MC PMPM ATC Why do monopolistically competitive firms advertise? To make demand less elastic.

Price Quantity 0 Monopolistic competition: long-run economic profit = 0. D MR QMQM MC PMPM ATC

Inefficiency and Monopolistic Competition 1. Doesn’t achieve productive efficiency because Price > Minimum ATC. 2. Doesn’t achieve allocative efficiency because Price > MC.

Inefficiency and Monopolistic Competition 3. Each firm has “excess capacity.” It is not producing at minimum ATC. There are too many firms producing too little quantity each. Excess Capacity

Price Quantity 0 Study Question #2: Comparing Monopolistic Competition and Perfect Competition. DMDM MR QMQM MC PMPM ATC DPDP QPQP P