(BQ) Part 2 book "Microeconomics" has contents: Elasticity, production and costs, perfect competition, government and product markets - antitrust and regulation; the distribution of income and poverty, international trade, international finance, globalization and international impacts on the economy,.and other contents. | Find more at Chapter © BRAND X PICTURES/JUPITER IMAGES MONOPOLISTIC COMPETITION, OLIGOPOLY, AND GAME THEORY Introduction How do firms in a market act toward each other? Are they fiercely competitive, much as runners in a race to the finish line where only one can be the winner? Or do firms act like people strolling in a park on a warm spring day, without a care in the world and certainly without competition on their minds? As you read this chapter, keep these two images in your mind. Also keep two words in mind: competition and collusion. This chapter is about both. THE THEORY OF MONOPOLISTIC COMPETITION Monopolistic Competition A theory of market structure based on three assumptions: many sellers and buyers, firms producing and selling slightly differentiated products, and easy entry and exit. The theory of monopolistic competition is built on three assumptions: 1. There are many sellers and buyers. This assumption holds for perfect competition too. For this reason, you might think the monopolistic competitor should be a price taker, but this is not the case. It is a price searcher, basically because of the next assumption. 2. Each firm (in the industry) produces and sells a slightly differentiated product. Differences among the products may be due to brand names, packaging, location, credit terms connected with the sale of the product, the friendliness of the salespeople, and so forth. Product differentiation may be real or imagined. For example, aspirin may be aspirin, but if some people view a name brand aspirin (such as Bayer) as better than a generic brand, product differentiation exists. 3. There is easy entry and exit. Monopolistic competition resembles perfect competition in this respect. There are no barriers to entry and exit, legal or otherwise. Examples of monopolistic competition include retail clothing, computer software, restaurants, and service stations. The Monopolistic Competitor’s Demand Curve 246 The perfectly .
