🛍️ Monopolistic Competition
Definition: Monopolistic competition.
Key features
- Many firms — each has a small market share.
- Differentiated products — firms compete through branding, quality, design, location (NOT identical goods).
- Low barriers to entry and exit — new firms can enter when profits are high.
- Some price-making power — differentiation means the firm's demand curve is downward-sloping (not flat like in PC).
- Non-price competition — advertising, packaging, loyalty programmes, product innovation.
Real-world examples: Restaurants, hairdressers, clothing brands, smartphone apps, coffee shops. Products are similar but not identical — each firm has a niche.
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⚖️ Evaluation: MC vs Perfect Competition
Inefficiencies of monopolistic competition
- Allocatively inefficient — P > MC in the long run (firms have some market power).
- Productively inefficient — not at minimum ATC due to excess capacity.
- Wasteful advertising — resources spent on ads rather than improving products.
Benefits of monopolistic competition
- Consumer choice — differentiation gives variety (many restaurant types, not just one).
- Innovation — firms compete by improving products, not just cutting prices.
- Dynamic efficiency — firms innovate to maintain their edge.
- Only normal profit in LR — consumers not exploited as in monopoly.
Excess capacity means firms produce on the downward-sloping part of ATC. Society 'pays' for variety with slightly higher costs — whether this trade-off is worthwhile is a judgment call. For top marks, discuss this trade-off explicitly.