3/23/2018Monopolistic Competition | Boundless EconomicsDefining Monopolistic CompetitionMonopolistic competition is a type of imperfect competition such thatmany producers sell products that are differentiated from one another.LEARNING OBJECTIVESEvaluate the characteristics and outcomes of markets withimperfect competitionKEY TAKEAWAYSKey PointsMonopolistic competition is different from a monopoly.A monopoly exists when a person or entity is theexclusive supplier of a good or service in a market.Markets that have monopolistic competition areinefficient for two reasons. First, at its optimum outputthe firm charges a price that exceeds marginal costs.The second source of inefficiency is the fact that thesefirms operate with excess capacity.Monopolistic competitive markets have highlydifferentiated products; have many firms providing thegood or service; firms can freely enter and exits in thelong-run; firms can make decisions independently;there is some degree of market power; and buyers andsellers have imperfect information.Key Termsmonopoly: A market where one company is the solesupplier.
3/23/2018Monopolistic Competition | Boundless EconomicsMonopolistic competition: A type of imperfectcompetition such that one or two producers sellproducts that are differentiated from one another asgoods but not perfect substitutes (such as frombranding, quality, or location).Monopolistic CompetitionMonopolistic competition is a type of imperfect competition such thatmany producers sell products that are differentiated from one anotheras goods but not perfect substitutes (such as from branding, quality, orlocation). In monopolistic competition, a firm takes the prices chargedby its rivals as given and ignores the impact of its own prices on theprices of other firms.Unlike in perfect competition, firms that are monopolistically competitivemaintain spare capacity. Models of monopolistic competition are oftenused to model industries. Textbook examples of industries with marketstructures similar to monopolistic competition include restaurants,cereal, clothing, shoes, and service industries in large cities.
3/23/2018Monopolistic Competition | Boundless EconomicsClothing: The clothing industry is monopolistically competitive becausefirms have differentiated products and market power.