- Monopolistic competition
- Monopolistic competition is a market in which many firms compete against each other, each selling a product that is distinctive in some way.
- Monopoly
- A monopoly is a firm that sells all or nearly all of the goods and services in a given market, so it faces the market demand curve.
Judging the long-run outcome
Can you name the three points to weigh when you judge monopolistic competition in the long run?
Once entry has taken profit away, the outcome can be tested against perfect competition. Two tests go against it and one goes in its favour.
Excess capacity is when a firm in long-run equilibrium produces less than the output at the lowest point of its average cost curve, so it could make more at a lower cost per unit.
Can you think of an example?
A town has six hairdressers, each with a chair empty for much of the day. Fewer, busier salons could cut hair at a lower cost per haircut.
Allocative inefficiency is when price is above marginal cost, so buyers value one more unit at more than it would cost to make, and it goes unmade.
Can you think of an example?
A restaurant charges £16 for a dish that costs £10 more to make. Diners who would pay £12 for it go without, though it would cost less than that to make.
Variety and choice are the benefit of product differentiation: buyers can pick among many styles, flavours and services rather than one identical product.
Can you think of an example?
A high street with a Turkish grill, a vegan café and a fish and chip shop offers more than three identical canteens would, even at slightly higher prices.