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Ch 17 Monopolistic competition Basically, there are millions of this guy.

A monopolistic competition is characterized by three attributes: many firms, similar products(but not identical), and free entry. Like monopoly, the market has excess capacity, meaning that it operates on downward sloping portion of the average total cost curve. Also, each firm charges a price above the marginal cost because firms want profit. In monopolistic competition, the firms get profit in the short run. Like this

However, if we consider the long run result, the firm gets zero profit because the marginal revenue becomes equal with demand at equilibrium price.

Monopolistic competition does not have all the desirable properties of perfect competition. Because the firms charge price above the marginal cost, there are deadweight losses like that of monopolies. Also, the number of firms may be too small or too large. The ability of policy makers to correct these inefficiencies is limited.

The product differentiation in this competition leads to the use of advertising and brand names. Critics of advertisement and brand names argue that firms use them to take advantage of consumer irrationality and to reduce competition. Defenders say that firms use them to inform consumers and to compete more vigorously on price and product quality.

Ch 17 key terms: monopolistic competition: a market structure in which many firms sell products that are similar but not identical

Sources: http://www.the-jersey-lilly-of-clutterbuck.com/monopoly_man_out_of_luck.gif http://spot.colorado.edu/~kaplan/econ2010/section11/gifs/fig111.gif

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