Monopolistic competition

Intermediate market extremes of pure competition and monopoly.

Monopolistic competition and oligopoly these two market structures are often lumped
together into a market characterized by imperfect completion.
Edward H. Chamberlin an American economist who developed the theory of
monopolistic competition.
theory of monopolistic competition E.H Chamberlin based his theory on solid empirical
fact.
Price Differentiation;
Product differentiation the basic idea behind monopolistic is that most firm face
relatively close substitutes and that most commodities are not completely homogenous from
one product to another.
Real differences - can exist when functional features, material, design are important
aspects of product differentiation.
Imaginary differences can exist through effective use of advertising, packaging
trademarks, and brand names.
Monopolistic competition refers to the market organization in which a relatively large
number of small producers or suppliers are offering similar but not identical products.
Pure competition requires hundreds, thousands, or even million of producers.
Monopolistic competition does not require the presence of thousands or millions of
firms or producers but only a fairly large number, say 15 25 40 50.
The short-run equilibrium short-run pricing and output determination for monopolistic
competition are similar to that of market situations. It is primarily an analysis of the
adjustment of the individual firm to the condition each firm faces.
Profit maximization the firms short-run average cost curve and the short-run marginal
cost curve are shown as SAC and SMC, respectively.
Short-run loss minimization losses will be minimized at the point where marginal cost
equals marginal revenue. Losing firms can make an exit in the industry.
Adjustment: Entry blocked blocked entry into an industry characterized by monopolistic
competition clearly will not be the usual case; still it may, and sometimes, does, occur.
Where it occurs, it is usually the result of legislative activity of some kind.
Adjustment: Open entry a large number of firms existing in the industry suggest that the
size of each firm is not so big and that effective collusion would be extremely difficult. Thus,

unless through government intervention, most of the bars to entry are not effective in
markets of monopolistic competition.
Output restriction if one of the industries of a purely competitive economy in long-run
equilibrium were to become monopolistically competitive, welfare would tend to be reduced
a slight restriction of output and a slight increase in the prices charged for the product.
Efficiency of individual firms there will be some inefficiency of individual firms in the
long-run when entry into the industry is easy; that is, the firm will not be induced to build the
most efficient size of plant nor to operate the one it does build at the most efficient rate of
output.
Range of products available consumers will have a broad range of types, styles, and
brands of particular products from which to choose in market situations of monopolistic
competition.