2. Monopolistic Competition
The market structure/model of monopolistic competition is based on the following assumptions:
There are no barriers to entry and exit (And therefore  a large number of firms)
AND
There is product differentiation - not homogenous goods but differentiated by, for example:
Quality differences
Location
Product image
Services
Examples include restaurants, clothing, shoes, book publishing, processed foods of all kinds, laundry detergent, toothpaste..
It is another type of imperfect market structure

4. (continue)
Market structure combines both elements of perfectly competitive markets and monopoly
It resembles perfectly competitive market because there are many firms in the industry and there are free entry and exit
It is like monopoly because of product differentiation (single producer of its particular kind/version of the good) and faces a downward sloping demand curve e.g. Adidas is monopoly of Adidas shoes, Nike monopoly of Nike shoes, etc.
However, because each of these products is at the same time a substitute for the other, the demand curve facing the firm is relatively more elastic (more horizontal and flat) than in the case of monopoly

5. More Elastic Demand Curve than Monopoly

6. Economic Analysis of the Behavior of the Firms in Monopolistic Competition

7. Profit Maximization in the Short Run
The short run equilibrium position of the individual firm in monopolistic competition is identical to that of the monopolist with the only difference being the price elasticity of the demand curve (more flat)
The firm applies the profit maximization rule MC = MR and can earn economic profits or losses as shown below

9. BUT…………. in the Long Run
The assumption of free entry and exit of firms-
 ……………………………………………..if existing firms are making a positive (abnormal) profit 

10.  Final LR Equilibrium

11. Efficiency Analysis of the Monopolistic Competition Outcomes

12. Efficiency vs………………
In monopolistic competition, just like in the case of monopoly, neither allocative efficiency nor productive efficiency are achieved in the short run and long run. And the firm produces with EXCESS CAPACITY (unexploited econs of scale)
HOWEVER , product variety could be perceived as beneficial for the society.
ALSO firms have incentive to try to produce better or more innovative products (to shift D curve right) or to try to reduce costs with technological innovation

13. As in the case of monopoly, we can see that P and MB is higher than MC, indicating that there is an underallocation of resources to the production of the good. Society would have been better off if more of the good is produced
Also production occurs at a point with AC greater than minimum ATC which symbolizes that some of the scarce resources are wasted and production is not the most efficient

14. Price and Non-Price Competition
Price competition occurs when a firm lowers its price to attract customers away from rival firms thus increasing sales at the expense of other firms
Non-Price competition occurs when firms use methods other than price reeducations to attract customers from rivals
Most common methods are product differentiation, advertising, branding, quality improvements etc.
Firms therefore engage heavily in R&D for product development and methods to create consumer loyalty and favoritism
If they are successful, they can attract customers and gain monopoly power by taking control of the price i.e. can charge a high price without losing customers e.g. $200 Nike shoes
In other words, the non-price competition methods affects the substitutability of the good, elasticity of the demand, and the monopoly power of the firm
If the monopolistically competitive firm can be successful in creating differentiated brand and loyalty through non-price competition, there is less need to rely on price competition

15. Summary Comparison with Other Market Structures

16. Comparison of Monopolistic Competition with Perfectly Competitive Markets
Similarities:
Large number of firms
Free entry and exit
economic profits or loss in the SR but only normal profits in the LR
Differences:
Market power (control over price) and downward-sloping demand curve
Allocative and productive inefficiency (excess capacity) in SR and LR
Product variety
Room for economies of scale

17. Comparison of Monopolistic Competition with Monopoly
Similarities:
Market power and downward-sloping demand curve
Allocative and productive inefficiency in SR and LR
Room for economies of scale
Firms engaging in R&D and product innovation (non-price competition)
Differences:
Number of firms
Size of firms
Lack of barriers to entry and competition
Drive prices down in the LR
Drive costs down in the LR
Normal profits in the LR
elastic demand curve