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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. | 17 Monopolistic Competition Monopolistic Competition Imperfect competition refers to those market structures that fall between perfect competition and pure monopoly. The Four Types of Market Structure Copyright © 2004 South-Western • Tap water • Cable TV Monopoly (Chapter 15) • Novels • Movies Monopolistic Competition (Chapter 17) • Tennis balls • Crude oil Oligopoly (Chapter 16) Number of Firms? Perfect • Wheat • Milk Competition (Chapter 14) Type of Products? Identical products Differentiated products One firm Few firms Many firms Monopolistic Competition 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. Monopolistic Competition Attributes of Monopolistic Competition Many sellers Product differentiation Free entry | 17 Monopolistic Competition Monopolistic Competition Imperfect competition refers to those market structures that fall between perfect competition and pure monopoly. The Four Types of Market Structure Copyright © 2004 South-Western • Tap water • Cable TV Monopoly (Chapter 15) • Novels • Movies Monopolistic Competition (Chapter 17) • Tennis balls • Crude oil Oligopoly (Chapter 16) Number of Firms? Perfect • Wheat • Milk Competition (Chapter 14) Type of Products? Identical products Differentiated products One firm Few firms Many firms Monopolistic Competition 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. Monopolistic Competition Attributes of Monopolistic Competition Many sellers Product differentiation Free entry and exit Monopolistic Competition Many Sellers There are many firms competing for the same group of customers. Product examples include books, CDs, movies, computer games, restaurants, piano lessons, cookies, furniture, etc. Monopolistic Competition Product Differentiation Each firm produces a product that is at least slightly different from those of other firms. Rather than being a price taker, each firm faces a downward-sloping demand curve. Monopolistic Competition Free Entry or Exit Firms can enter or exit the market without restriction. The number of firms in the market adjusts until economic profits are zero. COMPETITION WITH DIFFERENTIATED PRODUCTS The Monopolistically Competitive Firm in the Short Run Short-run economic profits encourage new firms to enter the market. This: Increases the number of products offered. Reduces demand faced by firms already in the market. Incumbent firms’ demand curves shift to the left. Demand for the incumbent firms’ products fall, and their .
