Question

Consider the monopolistically competitive market structure, which has some features of a perfectly competitive market and some features of a monopoly.

Complete the following table by indicating whether each attribute characterizes a perfectly competitive market, a monopolistically competitive market, both, or neither. Check all that apply.

Answer 1

A monopolistically competitive market is characterized by the following attributes:

•	Many sellers and buyers
•	Each firm produces and sells a slightly differentiated product
•	Entry and exit are easy

In a monopolistically competitive market structure, many firms compete for the same group of customers. Under this market structure, each firm produces a product that is at least slightly different from those of other firms, while easy entry allows firms to enter (or exit) the market without restriction.

Because of these characteristics, monopolistic competitors resemble monopolists in that they are not price takers. Rather, they face a downward-sloping demand curve for their product; thus, the profit-maximizing price is always above marginal cost (P>MC" role="presentation" style="display: inline; line-height: normal; word-spacing: normal; overflow-wrap: normal; float: none; direction: ltr; max-width: none; max-height: none; min-width: 0px; min-height: 0px; border: 0px; padding: 0px; margin: 0px; position: relative;">P>MC$\mathit{P}>\mathit{MC}$). However, profit for each firm is driven to zero in the long run, as the demand for each firm's product adjusts with the entry and exit of other firms until price equals average total cost (P=ATC" role="presentation" style="display: inline; line-height: normal; word-spacing: normal; overflow-wrap: normal; float: none; direction: ltr; max-width: none; max-height: none; min-width: 0px; min-height: 0px; border: 0px; padding: 0px; margin: 0px; position: relative;">P=ATC$\mathit{P}=\mathit{ATC}$).

Although monopolistic competition, like oligopoly, is viewed as intermediate between the extreme market structures of perfect competition and monopoly, it differs from oligopoly in that it is characterized by many sellers. Under oligopoly, the industry is dominated by a relatively small number of large firms that account for a large proportion of total sales, making rigorous competition less likely and increasing the importance of strategic interactions.

Therefore, monopolistic competition differs from perfect competition in that firms sell differentiated products and are not price takers, but it resembles perfect competition in that there is easy entry, there are many sellers and buyers, and there is zero profit in the long run.