Monopolistic competition: market structure in which many sellers each produce similar, but slightly differentiated, products. Much of the world’s output of services produced monopolistically competitive industries.Examples… Doctors Doctors Restaurants Restaurants Dentists Dentists Hotels and guesthouses Hotels and guesthouses Hairdressers Hairdressers Doctors Doctors Restaurants Restaurants Dentists Dentists Hotels and guesthouses Hotels and guesthouses Hairdressers Hairdressers Lawyers Lawyers Corner shops Corner shops Accountants Accountants Architects Architects Fast-food outlets Fast-food outlets Lawyers Lawyers Corner shops Corner shops Accountants Accountants Architects Architects Fast-food outlets Fast-food outlets

the act of making a product that is slightly different to the product of a competing firm. Product differentiation: the act of making a product that is slightly different to the product of a competing firm. Differs from perfect comp. in that many firms produce a differentiated product. Goods/services good substitutes, but differentiated. Homogeneous or heterogeneous – consumers decide!

real perceived The greater the real or perceived differentiation, the less price elastic demand becomes.

Many sellers, BUT each has monopoly of its own differentiated product & therefore some market power. Eg – dentist that’s great with children

Ability to increase price (use market power) limited due to substitutes. Therefore, face a downward-sloping demand curve. Demand more price elastic (flatter) than for oligopolistic firms, due to increased consumer choice.

Implies ability to make economic profits (or losses) only in short run. In the long run only normal profits possible.

consumersother firms Firms do not have perfect information about consumers’ or other firms behaviour.

Downward-sloping D = AR PED > monopoly Economic profit per unit = AR - AC at Q 1. MR intersects halfway between the price axis & demand (AR) Profit is maximised where MR = MC P 1 ; Q 1

Demand falls (substitutes). D & MR shift left. Demand falls (substitutes). D & MR shift left. No further entry into the industry. D becomes more price elastic (more close substitutes) D becomes more price elastic (more close substitutes) Economic profits eliminated MR = MC & AR = AC. AR curve tangent to AC curve. MR = MC & AR = AC. AR curve tangent to AC curve. SHORT RUN EQUILIBRIUM LONG RUN EQUILIBRIUM Good example with figures on page 181 of text book…

Each firm has a monopoly of its differentiated product. BUT… BUT… face strong competition from many other firms in the industry. All firms try to increase demand make economic profits. BUT… BUT… free entry ensures that normal profits made in long run.