Outcomes

Discuss the assumptions/ characteristics of

monopolistic competition
Illustrate and explain both the short run and
long run situation of a monpolistic competitive
firm.
Compare a monopolistic competitive firms
long run situation with a perfect competitive
firm situation in the long run.

The Chamberlin Model

Assumption: a clearly defined industry group, which

consists of a large number of producers of products
that are close, but imperfect, substitutes for one
another.

Two implications:
1. Because the products are viewed as close
substitutes, each firm will confront a downwardsloping demand schedule.
2. Each firm will act as if its own price and quantity
decisions have no effect on the behaviour of other
firms in the industry.

Assumptions
1. Many buyers & sellers
2. Differentiated Products (but substitutes)
Product differentiation

3. No Barriers to entry/exit

Price and Output

Demand = negative slope
Why?

MR curve lies beneath the demand curve why?

P > MR

Output: where MR = MC
Sell this quantity at highest price (on demand)
P > MC
If P > ATC = firm makes economic profit in short run

Figure 11.14: Short-Run Equilibrium

Continues
In long run:
Economic profit attracts new firm (no barriers)
Equilibrium: all firm produce where:
MR = MC and P = ATC
Zero economic profit

Fig. 11.15: Long term

equilibrium

Perfect Competition vs Monopolistic

Competition
Perfectly competitive
firm

Monopolistically
competitive firm

Output

MC = MR

MR = MC

Allocative
efficiency

P = MC
Allocation efficient

P > MC
Allocation inefficient

Production
efficiency

Produce at min ATC

Produce efficient

LR profit

Zero economic profit

Does not produce at min

ATC = excess capacity
Produce inefficient
Zero economic profit

Figure 11.16:Monopolistic Competition

Equilibrium and Perfectly Competitive
Equilibrium

Price

Price
MC

MC
AC

AC

pMC

pC

D = MR
D
MR

QC

Quantity 0

QMC

Quantity