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Unit 10

Monopolistic Competition

  • Many sellers
  • Product differention: each firm's product is at least slightly different from another firm's
  • Each firm faces a downward sloping demand curve, like a monopolist
  • Free entry and exit
  • Firms are price setters to some degree

The monopolistically competitive firm will maximize profits when it produces where its MC = MR and charge a price based on demand (just like a monopoly)

If there are positive profits or losses, firms will enter or exit until the firms are making exactly zero economic profits (P = ATC) (like perfect competition)

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Characteristics of Monopolistic Competition

  • As in monopoly

  • P > MC

  • MR = MC to maximize profits

  • MR < P since demand is downward sloping

  • As in a competitive market

  • P = ATC in LR equilibrium

  • free entry and exit drive economic profit to zero

  • Produce at excess capacity: they produce a level of Q where ATC is above minATC, unlike perfectly competive firms

image-20211115210110142

Last update: November 15, 2021
Created: November 15, 2021