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Monopolistic competition (0)

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Monopolistic Competition
Market Power
Firms in monopolistic competition or imperfectly competitive markets are more likely to have limited market power because there are many firms with differentiated products (there are substitutes ) and there is relative ease of entry and exit into the market
Market Power among Sellers
  • Monopolistic competition - a market with a large number of sellers and relatively free entry; each firm “differentiates” its product.
  • Oligopoly - a market characterized by significant barriers to entry and “a few “sellers who recognize their interdependence in the market; products may be homogeneous or differentiated.

Monopolistic Competition
  • Large number of sellers
  • relative ease of exit / entry
  • products are differentiated
    • actual differentiation
    • perceived differentiation
Only difference from pure comp. is that the demand faced by the firm is not perfectly elastic; MR will lie below the Demand function (AR)
Relaxing the characteristic of outputs from homogeneous to “differentiated products” was the basic change from the purely competitive market model.
Thedifferentiation of output results in the demand faced by each seller being less than perfectly elastic.
  • Since there are “many sellers,” many substitutes for each seller’s output is implied.
This suggests that the demand faced by a firm in a monopolistically competitive market is likely more elastic than in a monopoly .
The elasticity obviously depends on the preferences and behavior of the buyers.
The negative slope of a firm’s demand function in imperfect competition results in a different result than in pure competition
The conditions of entry and exit to and from a monopolistically competitive market are similar to the purely competitive market; there are no major BTE.
  • Entry and exit are relatively easy. The relative ease of entry/exit makes the long run results of an imperfectly competitive market different from a monopoly.

Price Discrimination
Price discrimination – selling the same good or service at a number of different prices.
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