Price under monoplastic competitionPrice under monoplastic competition
26/June/2025 00:49
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What is Monopolistic Competition?
Monopolistic competition is a market structure that combines features of both perfect competition and monopoly.
> Definition:
Monopolistic competition is a market where many sellers offer similar but not identical products, and each firm has some degree of monopoly power due to product differentiation.
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? Main Characteristics of Monopolistic Competition
Feature Explanation
Large Number of Sellers Many firms compete for the same group of customers
Product Differentiation Each firm offers slightly different products (brand, quality, design, etc.)
Freedom of Entry and Exit Firms can easily enter or leave the market
Independent Decision-Making Each firm acts independently without collusion
Some Control Over Price Due to brand loyalty or differentiation, firms can influence prices
Non-Price Competition Firms compete using advertising, packaging, customer service, etc.
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? Price Determination under Monopolistic Competition
? In the Short Run:
Firms behave like monopolists due to differentiated products.
They maximize profit where:
\text{MR} = \text{MC}
Possibilities:
Supernormal profit, normal profit, or loss.
In the Long Run:
Due to free entry and exit, abnormal profits attract new firms.
Demand curve shifts leftward for each firm due to competition.
Equilibrium is reached where:
\text{Price (AR)} = \text{Average Cost (AC)}
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Monopoly vs Monopolistic Competition
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? Diagram: Short Run vs Long Run in Monopolistic Competition
1. Short Run
Downward sloping AR (Average Revenue)
MR < AR
Profit when AR > AC at the point of equilibrium
2. Long Run
AR tangent to AC
No supernormal profit
(I can generate this diagram as an image if needed.)
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✅ Conclusion
Monopolistic competition represents a real-world market situation (e.g., clothing, toothpaste, fast food). While firms enjoy pricing power, consumer choice and competition limit their long-term profit potential.
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Would you like:
An image diagram of short-run and long-run equilibrium?
