11.2 Monopolistic Competition LO 3
Monopolistic competition is a market structure that has the same
characteristics as perfect competition except that the many firms each
sell a differentiated product rather than all selling a single
homogeneous product. Firms face negatively sloped demand curves
and may earn profits in the short run.
As in a perfectly competitive industry, the long run in the theory of
monopolistic competition sees new firms enter the industry whenever
profits can be made. Long-run equilibrium in the industry requires
that each firm earn zero profits.
In long-run equilibrium in the theory of monopolistic competition,
each firm produces less than its minimum-cost level of output. This is
the excess-capacity theorem associated with monopolistic
competition.
Even though each firm produces at a cost that is higher than the
minimum attainable cost, the resulting product variety is valued by
consumers and so may be worth the extra cost.