Mostly summarized from Gregory Mankiw’s Principles of Economics, 5th Ed.

PART 5 Firm Behavior and the Organization of Industry

Chapter 16 of 36 Monopolistic Competition

Section 15 of 15

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Table 1 here

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Table 1 lists similarities and differences among perfect competition, monopolistic competition, and monopoly

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Monopolistic competition is a hybrid of monopoly and competition.

Like a monopoly, each monopolistic competitor

· faces a downward-sloping demand curve

· charges a price above marginal cost

Like perfect competition, with monopolistic competition

· there are many firms

· entry and exit drive the profit of each monopolistic competitor toward zero

…

Monopolistically competitive firms produce differentiated products so firms advertise to attract customers to its own brand.

Advertising of monopolistically competitive firms

· to some extent manipulates consumers' tastes, promotes irrational brand loyalty, and impedes competition

· to a larger extent provides information, establishes brand names of reliable quality, and fosters competition

…

The theory of monopolistic competition

· describes most markets in the economy

· does not yield simple and compelling advice for public policy

Regarding monopolistically competitive markets, from the standpoint of

· an economist: the allocation of resources is not perfect, because price is higher than marginal cost

· a policymaker: there is economic deadweight loss but it would be difficult to lessen it, regulatory controls would hurt more than help

(end of chapter 16 of 36)

….

Congratulations! … 44% of the way to becoming a competent economist… 

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