Chapter 16: Monopolistic Competition o The purpose of this chapter is to learn about a market structure in which many firms sell products that are similar but not identical.

o Learning Objective:

▪ What market structures lie between monopoly and competition

▪ Competition among firms that sell differentiated products

▪ How the outcomes under monopolistic competition and under perfect competition compare

▪ Desirability of outcomes in monopolistically competitive markets

▪ Debate over the effects of advertising

▪ Debate over the role of brand names

o Imperfect competition are those types of markets that are between perfect competition and monopoly

▪ Monopolistic competition is one such example.

o Characteristics of Monopolistic competition

▪ Many sellers

▪ Products are slightly different

• Producers are not price takers which means they each face a downward sloping demand curve

▪ Free entry and exit, therefore, zero economic profit in the long run

▪ Example: Pho, Cereal?

o Short Run Equilibrium of Monopolistic Competition

▪ Profit maximization decision is similar to monopolist

• Produce the quantity where MR =MC

• Price is set on the demand curve

• If P > ATC: profit

• If P < ATC: loss (potential similar to short run competitive firm)

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o Long Run Equilibrium

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▪ Zero economic profit

• If firms are making profit in short run

o new firms enter the market