Market Structures 2: Monopolistic Competition

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  • Created by: TessAni
  • Created on: 18-01-13 18:04
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  • Monopolistic Competition
    • A market structure with many firms producing a differentiated product and where there are few barriers to entry and exit
    • Characteristics
      • Firms are price makers because of product differentiation
        • Product differentiation - minor variations
      • Product differentiation - minor variations
      • Large number of firms in the market but none particularly large
      • Downward sloping demand curve that tends to be elastic
      • Low barriers to entry
      • Short term supernormal profits which attract firms - this profit is then competed away
      • Non-price competiition
    • Transport Relevance
      • Supporters of deregulation believed that removal of barriers to entry in transport market would create monopolistic competition
      • 1985 Transport Act worked briefly but has become less successful
      • Areas of success in some bus markets - Manchester
      • Best example: taxi provision - non-price competition and brand loyalty high
    • Equilibrium
      • Both S + LR  price is greater than MC
      • Despite competing away the sueprnormal profit allocative efficiency is still not achieved
      • PE not being achieved (in either S/LR) operating above the minimum point on the AC curve
      • This is called excess capacity


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