Question

6. (15 points) Explain the key features of monopolistic competition, including how it differs from oligopoly. Also explain (and illustrate graphically) how equilibrium is determined in the short and long run under monopolistic competition. In monopolistic competition try MR=MC

Answer 1

Monopolistic competition is a form of market situation with large number of buyers and sellers selling closely related or differentiated products but not identical product. The products are close substitutes of each other. Product differentiation is the important feature of monopolistic competition. Each firm under monopolistic competition enjoys the monopoly over the brand of the commodity and thus the firm has the control over the price of the commodity. Under this form of competition, MR < AR and AR and MR curve slope downwards and MR curve lies below AR curve. But these curves are more elastic than curves under monopoly. Example: Firms producing different brands of soaps like Dove, Lux, lifebuoy, etc. Monopolistic competition possesses features of monopoly and perfect competition.

Oligopoly is a form of market structure with few large firms who produces homogeneous or differentiated products intensely competing against each other. There is interdependence of firms in decision-making. Under this form of market, prices are normally rigid as firms are afraid of immediate reactions of the rival firms which may start price war. The demand curve facing an oligopoly firm is indeterminate because of high degree of interdependence among oligopolistic firms. Example: Auto-producers in the Indian market; Hyundai, Honda, Tata, Ford are some well-known brand names.

Long Run Short run Short run Price, Price, Price, Cost Cost Cost мC мс мс ATC ATC No profit no loss Loss ATC Profit Demand Demand Demand MR MR MR Q* Q* Q* Quantity Quantity Quantity