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Unformatted text preview: Chapter 17 Monopolistic Competition WHATS NEW IN THE THIRD EDITION: A new summary table has been added that compares monopolistic competition to monopoly and perfect competition. LEARNING OBJECTIVES: By the end of this chapter, students should understand: competition among firms that sell differentiated products. how the outcomes under monopolistic competition and under perfect competition compare. the desirability of outcomes in monopolistically competitive markets. the debate over the effects of advertising. the debate over the role of brand names. CONTEXT AND PURPOSE: Chapter 17 is the final chapter in a five-chapter sequence dealing with firm behavior and the organization of industry. Chapters 14 and 15 developed the two extreme forms of market structurecompetition and monopoly. The market structure that lies between competition and monopoly is known as imperfect competition. There are two types of imperfect competitionoligopoly, which was addressed in the previous chapter, and monopolistic competition, which is the topic of the current chapter. The analysis in this chapter is again based on the cost curves developed in Chapter 13. 77 MONOPOLISTIC COMPETITION 17 78 Chapter 17/Monopolistic Competition The purpose of Chapter 17 is to address monopolistic competition a market structure in which many firms sell products that are similar but not identical. Recall, oligopoly differs from perfect competition because there are only a few sellers in the market. Monopolistic competition differs from perfect competition because each of the many sellers offers a somewhat different product. As a result, monopolistically competitive firms face a downward-sloping demand curve while competitive firms face a horizontal demand curve at the market price. Monopolistic competition is extremely common. KEY POINTS: 1. A monopolistically competitive market is characterized by three attributes: many firms, differentiated products, and free entry. 2. The equilibrium in a monopolistically competitive market differs from that in a perfectly competitive market in two related ways. First, each firm has excess capacity. That is, it operates on the downward-sloping portion of the average-total-cost curve. Second, each firm charges a price above marginal cost. 3. Monopolistic competition does not have all of the desirable properties of perfect competition. There is the standard deadweight loss of monopoly caused by the markup of price over marginal cost. In addition, the number of firms (and thus the variety of products) can be too large or too small. In addition, the number of firms (and thus the variety of products) can be too large or too small....
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