Having now studied perfect competition and Pure Monopoly, we will now step back towards the competitive end of the spectrum of market structures and examine monopolistic competition. A monopolistically competitive market is one with many small firms each selling differentiated products. The entry barriers are low, but firms do have some price making power. Since each firm’s output is slightly different from each other firm’s, the individual sellers will face a downward sloping demand curve, much like a monopolist. But since entry barriers are low, the chance of an individual firm earning economic profits in the long-run is small.
This lesson will introduce the characteristics of monopolistic competition and provide a detailed graphical analysis of an individual firm in a monopolistically competitive market. We will look at the market for restaurants, which shows may of the characteristics of the market structure.
In the end we will determine whether monopolistically competitive markets are efficient by examining the firm’s average total cost and its marginal cost compared to the price in the long-run equilibrium.