Monopolistic Competition

Monopolistic Competition

Courses Info

Monopolistic Competition

Monopolistic competition is similar to perfect competition. However all the products they sell are slightly differentitated. Due to this firms in monopolistic competition have a downward sloping demand curve and are able to set price.

Example

  • Hairdressers – All hairdressers differentiate themselves through the price, quality and experience they provide to customers.
  • Restaurants – Although they all provide food their products are differentiated in terms of price, quality and taste. Low barriers to entry also exist in this industry because it’s easy for anyone to set up a restaurant.

Characteristics

  • Many small firms
  • Low barriers to entry
  • Products are slightly differentiated
  • Perfect knowledge
  • Price makers

Monopolistic firms are price makers due to their differentiated products. Monopolistic firms have a downward sloping demand curves (AR & MR) due to their price setting abilities.

A Monopolistic firm makes supernormal profits in the short run when it’s the first firm in the market.

However due to low barriers to entry and attraction to the supernormal profits. Competitive firms will also enter increasing the supply of firms producing the same product. This will lead to a decrease in demand for the initial firm dominating the market and a reduction in it’s profits. Therefore firms in a monopolistic market will make normal profits in the long run.