Monopolistic competition is an imperfect market structure where many producers sell differentiated products. In the short run, monopolistically competitive firms maximize profits by producing where marginal revenue equals marginal cost. If price is above average total cost, the firm profits, and if below, it loses money. In the long run, free entry and exit causes firms to break even with price equal to average total cost where it is tangent to the demand curve. While inefficient relative to perfect competition, monopolistic competition provides variety that benefits consumers.

1. MONOPOLISTIC
COMPETITION
PRESENTED BY:
SHASHANK SHEKHAR SINGH
( DEPARTMENT OF PHARMACEUTICAL MANAGEMENT NIPER-HYD )
PM/2014/412Shashank S. Singh 1

2. MONOPOLISTIC COMPETITION IS A TYPE OF IMPERFECT COMPETITION SUCH
THAT MANY PRODUCERS SELL PRODUCTS THAT ARE DIFFERENTIATED FROM
ONE ANOTHER (E.G. BY BRANDING OR QUALITY) AND HENCE ARE NOT PERFECT2Shashank S. Singh

3. BETWEEN MONOPOLY & PERFECT
COMPETITION
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Shashank S.
Singh

4. TYPES OF MARKET STRUCTURE
• PERFECT COMPETITION
• OLIGOPOLY
• MONOPOLY/MONOPOLISTIC COMPETITION
• OLIGOPOLY
• FEW SELLERS
• OFFER SIMILAR OR IDENTICAL PRODUCTS
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Shashank S.
Singh

5. TYPES OF MARKET STRUCTURE
• MONOPOLISTIC COMPETITION
• MANY SELLERS
• PRODUCT DIFFERENTIATION
• NOT PRICE TAKERS
• DOWNWARD SLOPING DEMAND CURVE
• FREE ENTRY AND EXIT
• ZERO ECONOMIC PROFIT IN THE LONG RUN
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Shashank S.
Singh

6. THE FOUR TYPES OF MARKET STRUCTURE
Economists who study industrial organization divide markets into four types:
monopoly, oligopoly, monopolistic competition, and perfect competition.
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Shashank S. Singh

7. COMPETITION WITH DIFFERENTIATED
PRODUCTS
• MONOPOLISTICALLY COMPETITIVE FIRM IN SHORT RUN
• PROFIT MAXIMIZATION
• MARGINAL REVENUE = MARGINAL COST
• PRICE: ON THE DEMAND CURVE
• IF P > ATC(AVERAGE TOTAL COST): PROFIT
• IF P < ATC(AVERAGE TOTAL COST): LOSS
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Shashank S. Singh

8. MONOPOLISTIC COMPETITORS IN THE
SHORT RUN
(A) FIRM MAKES PROFIT
MONOPOLISTIC COMPETITORS, LIKE MONOPOLISTS, MAXIMIZE PROFIT BY PRODUCING THE QUANTITY AT
WHICH MARGINAL REVENUE EQUALS MARGINAL COST. THE FIRM IN PANEL (A) MAKES A PROFIT BECAUSE,
AT THIS QUANTITY, PRICE IS ABOVE AVERAGE TOTAL COST. THE FIRM IN PANEL (B) MAKES LOSSES
BECAUSE, AT THIS QUANTITY, PRICE IS LESS THAN AVERAGE TOTAL COST.
(B) FIRM MAKES
LOSSES
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Shashank S. Singh

9. A MONOPOLISTIC COMPETITOR IN THE LONG
RUN
In a monopolistically competitive market, if firms are making profit, new firms enter, and the demand curves
for the incumbent firms shift to the left. Similarly, if firms are making losses, old firms exit, and the demand
curves of the remaining firms shift to the right. Because of these shifts in demand, a monopolistically
competitive firm eventually finds itself in the long-run equilibrium shown here. In this long-run equilibrium,
9Shashank S. Singh

10. COMPETITION WITH DIFFERENTIATED
PRODUCTS
• THE LONG RUN EQUILIBRIUM
• ZERO ECONOMIC PROFIT
• DEMAND CURVE
• TANGENT TO AVERAGE TOTAL COST CURVE
• AT QUANTITY WHERE MARGINAL REVENUE = MARGINAL
COST
• PRICE = AVERAGE TOTAL COST
• PRICE EXCEEDS MARGINAL COST
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Shashank S. Singh

11. COMPETITION WITH DIFFERENTIATED
PRODUCTS
• MONOPOLISTIC VERSUS PERFECT COMPETITION, LONG RUN
EQUILIBRIUM
• MONOPOLISTIC COMPETITION
• QUANTITY: NOT AT MINIMUM ATC
• EXCESS CAPACITY
• P > MC, MARKUP OVER MARGINAL COST
• PERFECT COMPETITION
• QUANTITY: AT MINIMUM ATC
• EFFICIENT SCALE
• P = MC
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Shashank S. Singh

12. COMPETITION WITH DIFFERENTIATED
PRODUCTS
• MONOPOLISTIC COMPETITION & SOCIETY’S WELFARE
• SOURCES OF INEFFICIENCY
• MARKUP OF PRICE OVER MARGINAL COST
• DEADWEIGHT LOSS
• TOO MUCH OR TOO LITTLE ENTRY
• PRODUCT-VARIETY EXTERNALITY
• POSITIVE EXTERNALITY ON CONSUMERS
• BUSINESS-STEALING EXTERNALITY
• NEGATIVE EXTERNALITY ON PRODUCERS 12
Shashank S. Singh

13. MONOPOLISTIC COMPETITION: BETWEEN
PERFECT COMPETITION& MONOPOLY
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