Monopolistically competitive markets are very common in the

Monopolistically competitive markets are very common in the United States. Retail gasoline, hair stylists, auto repair facilities, fast food restaurants, and bars all fall into this type of market structure.
a. What are the basic characteristics of monopolistic competition? List and explain the three most important characteristics.
b. How can the firm in monopolistic competition attract customers to its business? Identify and briefly explain 3 forms of non-price competition.
c. The typical firm in a monopolistically competitive market does not earn long-run economic profit. Does that fact make it economically efficient? Explain why the firm will not able to earn long-run economic profit.

Solution

a) basic characteristics : Differentiated products , many sellers and buyers , each seller has slight control over market price , free entry and exit in the market . Seller sell slightly differentiated products which are close substitutues to each other but not homogeneous .

b) Firms in this market attract consumers by marketing and advertising strategies . They attract consumers by telling them that their product is better than the close substitutes in the market . Forms of non-price competition : location ( geographical market ) , product differentiation , advertising .

c) It becomes economically efficient in long run but in short run it has deadweight loss due to pricing higher than perfect competition . Firms do not earn long run economic profit since many firms enter in the long run and decrease profits .