9.3 Monopolistic Competition
Main Topics: Structural Characteristics, Short-Run Profit Maximization, Long-Run
AdjustmentStructural Characteristics
Sharing some of the characteristics of both perfect competition and monopoly, the market
structure of monopolistic competition provides a description of many modern industries.- Relatively large number of firms. Rather than the thousands of perfectly competitive firms,
in monopolistic competition there are perhaps dozens, each with a fairly small share of
the total market. - Differentiated products. This characteristic makes monopolistic competition stand out as
different from the perfectly competitive market structure and gives firms their ability to
set the price above the competitive level. - Easy entry and exit. There are very few barriers to entry in monopolistic competition, per-
haps the largest being the need to provide sufficient marketing to differentiate a new
firm’s product from that of the existing rivals.
The market for shoes closely fits the description of monopolistic competition. While
all shoes serve the same basic purpose, to cover and protect the feet, a running shoe, a
hiking boot, and a flip-flop are very different and are made by many firms in the global
market. The book publishing market is also described as monopolistically competitive.Short-Run Profit Maximization
Like the monopoly, the firm in monopolistic competition faces a downward-sloping
demand curve for its differentiated product. Because there are many similar substitutes
available to consumers, the demand is fairly elastic. In a recurring theme for profit-maxi-
mizing behavior, the firm sets Qmcwhere MR =MC and sets the price from the demand
curve. Figure 9.14 illustrates a monopolistically competitive firm that is earning positive
short-run economic profits.132 › Step 4. Review the Knowledge You Need to Score High
KEY IDEAQuantityDATCMCQmc$MRPmcATCProfit > 0Figure 9.14http://www.ebook3000.com