monopolistic
competition
Perfect Monopolistic
Oligopoly Monopoly
competition competition
Many firms with a Many firms with A few A single
homogeneous differentiated producers producer
product products with high
market power
Oligopolies and monopolistic competition
Oligopolies
Monopolistic competition
Oligopolies
p G
Inverse demand
facing firm A
mRA
q Quantity
Oligopolies
C1 q2 f 2 q1
C0
C3
C2 C
q*2
q*1 q1
Oligopolies
Oligopolies
Monopolistic competition
Monopolistic competition
Firm-market equilibrium
Firm level Market level
Price Price
mC
Positive
profits in the
short run S
AC
p
d
mR
D
q quantity Q Quantity
Monopolistic competition
Firm-market equilibrium
Firm level Market level
Price Price
Positive profits attract firms
mC to the market (free entry +
zero profits
in the long run perfect information)
S S
AC
p
p2 d
mR
D
q2 q quantity Q Q2 Quantity
Monopolistic competition
Price
Long run welfare implications
mC AC
In the long run, Total
revenue is equal to Total
cost ⇒ Profits are equal
to zero
p = AC Similar to perfect
p competition. An
improvement on
monopolies/oligopolies
Demand
mR
q Quantity
Monopolistic competition
Price
Long run welfare implications
mC AC
Demand
mR
Producer surplus q Quantity
Monopolistic competition
Price
Long run welfare implications
mC AC
Demand
mR
q q* Quantity
Monopolistic competition
AC AC
p p d
d mR
mR
q quantity q Quantity