Theory of monopolistic competition, Microeconomics

The very name of this market type suggests that it is a combination of the monopoly and competitive firms. The characteristics of such a market are:

1. There exists large number of firms in the industry.

2.There is product differentiation. That is, the products of the firms are close substitutes of each other. The product of each firm has a brand name which marks the difference in quality, packaging or reputation. The amount of monopoly power a firm possesses depends on how successfully it can differentiate and propagate its brand.

3. Free entry and exit of firms from the industry is allowed.

4. Decisions are taken by the firms independently.

The model of monopolistic competition was developed by Chamberlain. He extended the ideas of monopoly and competition to a group of firms dealing with class of product. He first analyzed the group assuming that all the firms had uniform cost and demand. He then considered what would happen if diverse conditions existed.

Therefore, under monopolistic competition the optimal price is higher and the level of output could be lower than under perfect competition. The profits of the firms may or may not be higher because of the expenditure required to maintain the degree of monopoly power. Chamberlin argues that monopolistic competition will not necessarily bring higher profits to the marginal firm in the industry but all the existing firms will make normal profits.

Posted Date: 3/13/2013 1:12:02 AM | Location : United States







Related Discussions:- Theory of monopolistic competition, Assignment Help, Ask Question on Theory of monopolistic competition, Get Answer, Expert's Help, Theory of monopolistic competition Discussions

Write discussion on Theory of monopolistic competition
Your posts are moderated
Related Questions
Question : (a) Explain why each of the following factors may influence the own price elasticity of demand for a commodity. (i) Consumer preferences, that is, whether c

Find the market-clearing price and quantity of burritos.

Explain how a floating exchange rate works and the variables which affect the rate. Define a floating exchange rate as the price of a currency (in terms of another or basket of

buyers cannot tell whether any given car is a lemon. The percent of all cars that are lemons is theta. How much is theta when all cars offered are sold?

How does production possibility curve help solve central problems?

Question: There is widespread belief that the process of globalization has largely bypassed Sub-Saharan Africa, leaving the sub-continent in a state of marginalization in the w

concept of innovation theory of profit and criticism

National income: The national income or product or expenditure provides a measure of total value at factor cost of final goods and services, which are available either fo

An economist's view of costs contains both explicit and implicit costs.  Explicit costs are accounting costs, and implicit costs are the opportunity costs of an allocation of resou