1. Monopolistically Competitive Industries
Microeconomics
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What is Marketing?
Principles of Marketing

2. Monopolistic Competition
Monopolistically competitive markets feature a large number of competing firms, but the products that they sell are not identical
Most of the markets that consumers encounter at the retail level are monopolistically competitive
(Credit: modification of work by Pixel Drip/Flickr Creative Commons)

3. Differentiated Products
A firm can try to make its products different from those of its competitors in several ways:
physical aspects of the product
location from which the product is sold
intangible aspects of the product
perceptions of the product

4. Perceived Demand for Firms in Different Competitive Settings
Principles of Microeconomics Chapter 10.2. Authored by: OpenStax College. Located BY: Attribution. License Terms: Download for free at

5. How a Monopolistic Competitor Chooses its Profit Maximizing Output and Price
Principles of Microeconomics Chapter 10.2. Authored by: OpenStax College. Located BY: Attribution. License Terms: Download for free at

6. Monopolistic Competition, Entry, and Exit
Principles of Microeconomics Chapter 10.2. Authored by: OpenStax College. Located BY: Attribution. License Terms: Download for free at

7. Advertising in Monopolistic Competition
In the framework of monopolistic competition, there are two ways to conceive of how advertising works:
It causes a firm’s perceived demand curve to become more inelastic (that is, it causes the perceived demand curve to become steeper)
It causes demand for the firm’s product to increase (that is, it causes the firm’s perceived demand curve to shift to the right)

8. Efficiency in Monopolistic Competition
The end result of entry and exit is that firms end up with a price that lies on the downward-sloping portion of the average cost curve, not at the very bottom of the AC curve
Thus, a monopolistically competitive industry will produce a lower quantity of a good and charge a higher price for it than would a perfectly competitive industry
Thus, monopolistic competition will not be productively or allocatively efficient

9. Is Differentiation Valuable to Society?
Yes No
based on variety and innovation
People don’t have to buy brand names
firms are struggling to figure out ways of attracting customers by methods like friendlier service, free delivery, guarantees of quality, variations on existing products, and a better shopping experience
Socially wasteful because people would be just as happy with lower prices and fewer options
Advertising and marketing don’t produce value

10. Practice Question
Why do you choose the brands you do in monopolistically competitive markets? Would you prefer a more efficient market with lower prices and fewer choices?

11. Quick Review
What are the characteristics of a monopolistically competitive industry?
How do economists calculate and graph the firm’s fixed, variable, average, marginal and total costs?
What is the difference between short run and long run equilibrium in a monopolistically competitive industry?
How does product differentiation works in monopolistically competitive industries? How do firms use advertising to differentiate their products? How does differentiation impact elasticity?
Why are monopolistically competitive markets inefficient?