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THE THEORY OF MONOPOLISTIC COMPETTION Monopolistic Competition or Imperfect Competition: This is a market structure that is said to combine elements of both perfect competition and monopoly. It is a theory of market structure based on three assumptions: 1) many sellers and buyers, 2) firms producing and selling slightly differentiated products, and 3) easy entry and exit. Assumptions: 1) There are many sellers and buyers This does not mean the monopolistic competitor is a price taker. It is a price searcher, basically because of the following assumptions. 2) Each firm produces and sells a slightly differentiated product e.g. brand names, packaging, location, credit terms connected with the sale of the product, friendliness of the salesperson, etc. 3) There is easy entry and exit There are no barriers to entry legal or otherwise. Monopolistic competition refers to that market situation in which a relatively large number of small producers produce often similar but not identical products. This does not require hundreds or thousands of firms but a fairly large number say 25, 35, 60 or 70 with each firm having a comparatively small % of the total market. The implication is a limited amount of control over market price. Product Differentiation : Is a method whereby a firm tries to distinguish its products from similar products of its rivals. It is product differentiation that makes competition in this type of market structure to be imperfect. Advertisement: The reasons are: a) Informative: To inform consumers about the existence of a product. b) Persuasive: To persuade consumers to consume one good rather than another c) Competitive NOTE a) The demand curve facing the firm is downward sloping due to product differentiation b) The demand curve is more elastic than that of a monopoly because of more substitutes c) P>MR due to a downward sloping demand curve which implies to sell more, prices have to
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This note was uploaded on 01/28/2011 for the course ECON 1 taught by Professor Sm during the Spring '10 term at Laney College.

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