Monopolistic Competition I A-Level and IB Economics

This topic covers monopolistic competition.

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Monopolistic competition is a market structure where many firms compete with each other by offering similar but slightly differentiated products. It combines elements of both monopoly and perfect competition. Here are some key characteristics of monopolistic competition:
Large number of firms: There are many firms in the market, but none has a large enough market share to influence the market price.
Product differentiation: Firms differentiate their products through branding, packaging, quality, or other features, allowing them to charge higher prices than in perfect competition.
Free entry and exit: There are no significant barriers to entry or exit, allowing new firms to enter the market and existing firms to exit, although product differentiation may require some sunk costs.
Price-setting power: Firms have some price-setting power due to product differentiation, but they must also consider the prices and actions of their competitors.
Imperfect information: Consumers may not have perfect information about the products or prices offered by different firms, allowing firms to charge higher prices based on perceived product differences.
Long-run profits: In the long run, firms in monopolistic competition may earn normal profits, as the entry of new firms tends to drive down prices and profits.
Monopolistic competition can lead to product variety and innovation, as firms strive to differentiate their products and attract customers. However, it may also result in higher prices and lower efficiency than in perfect competition, due to the costs of product differentiation and imperfect information.