monopolistic competition

Question 1

Definition of monopolistic competition and product differentiation

Answer 1

monopolistic competition- a form of market structure that shares some characteristics of monopoly and some of perfect competition
-product differentiation= a strategy adopted by firms that makes their product different from competitors

Question 2

What are the characteristics of monopolistic competition and what examples are there??

Answer 2

1) large number of firms
2) very low barriers to entry
3) product differentiation

fast food, hotels, pubs, consumer electronics

Question 3

How is product differentiation beneficial to firms?

Answer 3

Product differentiation means consumers deem products to be different among producers and so they maintain brand loyalty, products are close substitutes but not homogenous

Question 4

What does a short run monopolistic P/R/C diagram look like?

Answer 4

Same as a monopoly diagram, SNP made in the short run

Question 5

What does a long term monopolistic competition P/R/C diagram look like?

Answer 5

AR and MR sloping down due to price maker

-AC and MC, but AC hits AR above where MR=MC, so price= average cost and no SNP is made

Question 6

Why does monopolistic competition make no SNP

Answer 6

-The low barriers to entry and SNP in the short term attract new firms, allowing them to enter the market with ease. demand curve shifts to the left as demand is split between firms, therefore incumbent firms increase their spending on advertising, raising their AC to a point where they aren’t making SNP. All SNP has been competed away

Question 7

Advantages of disadvantages of monopolistic competition

Answer 7

ADV- Competition can lower prices for consumers due to the low barriers to entry

• lower X inefficiency as competition disciplines firms to lower AC
• greater equality due to no long run SNP, so consumers aren’t exploited by entrepreneurs who take risks using SNP and charge higher prices for it

DIS ADV- lack of productive and allocative efficiency

• money spent on advertising would be better spent elsewhere, but incumbent firms have no choice in order to maintain brand loyalty
• unable to fully exploit economies of scale may increase costs and therefore prices

Question 8

What does the extent of monopolistic competition being beneficial depend on??

Answer 8

Nature of the market- a highly competitive one is likely to Lower prices more than a less competitive one
-however due to the low fixed costs, larger firms may experience diseconomies of scale, so may be more beneficial to have more firms exploiting smaller EOS and making small profits