Price Control
Because there is differentiation in products for firms in a monopolistically competitive firm, as a result there is some
control over their prices. Despite the large number of firms present, the fact that these firms act independently of one
another allows them to set output quantities and pricing.
Entry and Exit of Market
Entry for a monopolistically competitive firm is fairly easy because firms in this market are relatively small. The smaller
a firm, the less market share a firm has in this case. Economies of scale are few, and the capital needed to start a monopo-
listically competitive firm is low. Compared with perfect competition, however, it is a little tougher to enter the market
because of product differentiation and product information.
Basic Points
Remember these basic points:
■ Firms have some price control, which results in their ability to set prices above marginal cost.
■ The short run yields profits for a monopolistically competitive firm.
■ The long run can only yield “normal profit.”
■ The demand facing this type of firm is very elastic because of the existence of many competitors with close
substitutes.Graphing the Monopolistically Competitive Firm
In Figure 10-8 we see the short-run and long-run monopolistically competitive firm. In the short run, firms can earn a
profit by introducing a new variety of a product. But in the long run, when other firms join the market as a result of new
varieties, profits will decline and eventually return to normal.
Figure 10-8Examining the graphs in these figures, we would not be able to tell what type of market structure is being depicted. The
only thing we could tell is that it is an imperfect market structure because of the existence of profit. If we were told it
was a monopolistically competitive market, then we would be able to distinguish between the long run and the short run
by looking at profit levels.
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Short Run Long RunDDMRMRMCATCMC
ATCPPrice/Cost Price/CostPProduct Markets and Profit Maximization