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Monopolistic competition: Occurs when there are many firms in the industry, each selling
a slightly differentiated product. One firm's products are not perfect substitutes for
another's so this means that the firms operating in the market are not price takers.
Large number of relatively small firms
Product differentiation exists (each firms products are slightly different from the next,
usually due to branding, advertising, quality etc.)
Few, if any barriers to entry.
Short run supernormal profits only.
How the market operates:
Firms may aim their differentiated products at different market segments and aim to sell
more than one type of the same product to get good market coverage. Firms are not price
takers, they have some control over their prices, but only as far as their brand image and
brand loyalty will stretch. In the short run firms may earn large profits. As other firms can
easily enter the market, large profits do no last very.
It is neither productive of Allocativly efficient. They have control over what price and output
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In the short run a firm in monopolistic competition will aim to profit-maximise and will
therefore produce where marginal cost is equal to marginal revenue. This may mean (as
here) that they are able to make supernormal profit. The amount of supernormal profit on
each unit is the difference between the average revenue (price) and the average cost of each
unit. To get the total supernormal profit, we then multiply by the output produced.…read more
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Advantages of Monopolistic Competition
Informed Consumers - Monopolistic competition requires consumers to become more
informed about the products and services available in the market. Businesses entering a
monopolistic competition market often engage in advertising to make their presence
known and differentiate themselves from other local businesses offering the same
products. Due to completion, firms under this market structure have to enhance their
visibility in the market through aggressive advertising and marketing.…read more