Main features of monopolistic competition , Short and long run monopolistic competition

1. MAIN FEATURES:
• Many number of sellers
• Product differentiation
• Freedom of entry of new firms and exit of
the old firms
• Higher elasticity of demand

2. • The amount of monopoly power depends
on the degree of differentiation
• Examples of this very common market
structure include:
– Toothpaste
– Soap
– Cold remedies

3. • Toothpaste
– Colgate and monopoly power
• Palmolive is the sole producer of Colgate
• Consumers can have a preference for
Colgate – taste, reputation, decay-
preventing efficacy
• The greater the preference (differentiation)
the higher the price

4. • Two important characteristics
– Differentiated but highly substitutable products
– Free entry and exit

7. MR
Short Run Long RunY
XX
Y
MC
AR
E
P
Q OO
R
MC
AR
AC
MR
Q
P
R
E

8. • Short run
– Downward sloping demand – differentiated
product
– Demand is relatively elastic – good
substitutes
– MR < P
– Profits are maximized when MR = MC
– This firm is making economic profits

9. • Long run
– Profits will attract new firms to the industry
(no barriers to entry)
– The old firm’s demand will decrease to DLR
– Firm’s output and price will fall
– Industry output will rise
– No profit (P = AC)