Monopolistic competition

Monopolistic competiton is a market structure dominated by many small firms , which produce  similar but slighlty differentiated products. In theory, it is the most efficient form of market structure out of oligopoly and monopoly. There are low barriers to entry and exit, so that there are no set up and sunk costs to new firms wishing to enter the market. in airline industry, the short haul flight firms operate in monopolistically competitive markets, and the abundance of information and access to technology and capital, knowledge of profitable routes are the caracteristics of Monopolistically competitive market.

In short run, the firms in the market will do Profit maximization objective and produce where MC=MR, where each extra unit produced adds more revenue that costs, this enables the firms to earn abnormal profits in short run, which is represented by ABCD rectangle. In the short run, the firms will earn a monopoly profits. In the long run, the supernormal profits will return to normal, due to the existence of low barriers to entry. The firm will not be able to raise its price over long run, as there is an inastic demand for its product and consumers will easily switch to other substitutes. The market will be vulnerable to hit-and-run competition, where the abnormal…