2. Monopolistic Competition…
Developed in1933 by American
economist Edward Chamberlin (18991967) and English economist
Joan Robinson (1903-1983)
Monopolistically competitive firm's own
demand curve is highly elastic,
permitting it to vary its price within a
narrow range of prices. The other firms'
products are either very close
substitutes or, a large number of other
firms' products are substitutes (not
necessarily very close substitutes).
3. Monopolistic Competition …
A type of competition within an industry
where:
1. All firms produce similar yet not
perfectly substitutable products.
2. All firms are able to enter the industry
if the profits are attractive.
3. All firms are profit maximizers.
4. All firms have some market power,
which means none are price takers.
4. Definitions of Monopolistic Competition …
Monopolistic competition differs from perfect
competition in that production does not take
place at the lowest possible cost. Because of this,
firms are left with excess production capacity.
A monopolistically competitive firm acts like a
monopolist in that the firm is able to influence
the market price of its product by altering the
rate of production of the product.
Unlike in perfect competition, monopolistically
competitive firms produce products that are not
perfect substitutes. As such, brand X's product,
which is different (or at least perceived to be
different) from all other brands' products, is
available from only a single producer.
5. Unlike in perfect competition, the
monopolistically competitive firm does not
produce at the lowest attainable average
total cost. Instead, the firm produces at an
inefficient output level, reaping more in
additional revenue than it incurs in
additional cost versus the efficient output
level.
To say that products are differentiated is
to say that the products may be (more or
less) good substitutes, but they are not
perfect substitutes. For example…
11. Long run equilibrium of the firm under perfect and
monopolistic competition
£
LRAC
P1
P2
DL under perfect
competition
DL under monopolistic
competition
O
Q1
Q2
Q
