In this chapter we examine markets that have some features of competition and some features of monopoly. This market structure is called monopolistic competition. Monopolistic competition describes a market with the following attributes: Many sellers, product differentiation, free entry. | Monopolistic Competition Chapter 17 Copyright © 2001 by Harcourt, Inc. All rights reserved. Requests for permission to make copies of any part of the work should be mailed to: Permissions Department, Harcourt College Publishers, 6277 Sea Harbor Drive, Orlando, Florida 32887-6777. The Four Types of Market Structure Monopoly Oligopoly Monopolistic Competition Perfect Competition Tap water Cable TV Tennis balls Crude oil Novels Movies Wheat Milk Number of Firms? Type of Products? Many firms One firm Few firms Differentiated products Identical products Types of Imperfectly Competitive Markets Monopolistic Competition Many firms selling products that are similar but not identical. Oligopoly Only a few sellers, each offering a similar or identical product to the others. Monopolistic Competition Markets that have some features of competition and some features of monopoly. Attributes of Monopolistic Competition Many sellers Product differentiation Free entry and exit Monopolistic . | Monopolistic Competition Chapter 17 Copyright © 2001 by Harcourt, Inc. All rights reserved. Requests for permission to make copies of any part of the work should be mailed to: Permissions Department, Harcourt College Publishers, 6277 Sea Harbor Drive, Orlando, Florida 32887-6777. The Four Types of Market Structure Monopoly Oligopoly Monopolistic Competition Perfect Competition Tap water Cable TV Tennis balls Crude oil Novels Movies Wheat Milk Number of Firms? Type of Products? Many firms One firm Few firms Differentiated products Identical products Types of Imperfectly Competitive Markets Monopolistic Competition Many firms selling products that are similar but not identical. Oligopoly Only a few sellers, each offering a similar or identical product to the others. Monopolistic Competition Markets that have some features of competition and some features of monopoly. Attributes of Monopolistic Competition Many sellers Product differentiation Free entry and exit Monopolistic Competitors in the Short Run. (a) Firm Makes a Profit Quantity 0 Price Demand MR ATC Profit MC Profit- maximizing quantity Price Average total cost A Monopolistic Competitor in the Long Run. Quantity Price 0 Demand MR ATC MC Profit-maximizing quantity P=ATC Monopolistic versus Perfect Competition There are two noteworthy differences between monopolistic and perfect competition—excess capacity and markup. Excess Capacity There is no excess capacity in perfect competition in the long run. Free entry results in competitive firms producing at the point where average total cost is minimized, which is the efficient scale of the firm. Excess Capacity There is excess capacity in monopolistic competition in the long run. In monopolistic competition, output is less than the efficient scale of perfect competition. Excess Capacity. Quantity (a) Monopolistically Competitive Firm (b) Perfectly Competitive Firm Quantity Price P = MR (demand curve) MC ATC Price Demand MC ATC Excess capacity Quantity .
