Monopolistic Competition and Oligopoly
ANSWERS TO END-OF-CHAPTER QUESTIONS
How does monopolistic competition differ from pure competition in its basic characteristics?
From pure monopoly?
Explain fully what product differentiation may involve.
Explain how the
entry of firms into its industry affects the demand curve facing a monopolistic competitor and
how that, in turn, affects its economic profit.
In monopolistic competition there are many firms but not the very large numbers of pure
The products are differentiated, not standardized.
There is some control over price
in a narrow range, whereas the purely competitive firm has none.
There is relatively easy entry;
in pure competition, entry is completely without barriers.
In monopolistic competition, there is
much nonprice competition, such as advertising, trademarks, and brand names.
competition, there is no nonprice competition.
In pure monopoly there is only one firm.
Its product is unique and there are no close substitutes.
The firm has much control over price, being a price maker.
Entry to its industry is blocked.
advertising is mostly for public relations.
Product differentiation may well only be in the eye of the beholder, but that is all the
monopolistic competitor needs to gain an advantage in the market—provided, of course, the
consumer looks upon the assumed difference favorably. The real differences can be in quality, in
services, in location, or even in promotion and packaging, which brings us back to where we
started: possibly nonexistent differences.
To the extent that product differentiation exists in fact
or in the mind of the consumer, monopolistic competitors have some limited control over price,
for they have built up some loyalty to their brand.
When economic profits are present, additional rivals will be attracted to the industry because
entry is relative easy.
As new firms enter, the demand curve faced by the typical firm will shift to
the left (fall).
Because of this, each firm has a smaller share of total demand and now faces a
larger number of close-substitute products.
This decline firm’s demand reduces its economic
) Compare the elasticity of the monopolistically competitor’s demand curve with
that of a pure competitor and a pure monopolist.
Assuming identical long-run costs, compare
graphically the prices and output that would result in the long run under pure competition and
under monopolistic competition.
Contrast the two market structures in terms of productive and
Explain: “Monopolistically competitive industries are characterized by too
many firms, each of which produces too little.”
The monopolistic competitor’s demand curve is less elastic than a pure competitor and more
elastic than a pure monopolist.
Your graphs should look like Figures 21.12 and 23.1 in the
Price is higher and output lower for the monopolistic competitor.
= MC (allocative efficiency);