ECON 1116 5 November Monopolistic Competition Free entry and exit price setting differentiated products many firms Many firms o Too many firms to make tacit collusion feasible as in oligopoly case Free entry and exit o Profits forced to zero in long run As in perfect competition case Differentiated products o Products are imperfect substitutes o Differentiated by Style type minivan versus sedans Location next door versus five miles away Quality mpg Consumer perception advertising and branding Price setting o Firms have the power to set prices within reason They face a downward sloping demand curve Firm demand isn t market demand it is firm specific Marginal revenue is also firm specific Profit optimizing behavior o In the short run Optimization when MR MC o In the long run When firms are profiting there are incentives to enter the market the market When firms are losing there are disincentives and firms exit Firm entry and exit shifts demand and MR curves since firms compete for the same consumers Incentives for greater differentiation Zero profits in the long run equilibrium Demand curve will shift outward until it lies tangent to ATC curve such that P ATC and firms earn zero profit
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