ECON 1116 5 NovemberMonopolistic Competition-Free entry and exit, price setting, differentiated products, many firms- Many firmso Too many firms to make tacit collusion feasible as in oligopoly case- Free entry and exito Profits forced to zero in long run As in perfect competition case- Differentiated productso Products are imperfect substitutes o Differentiated by: Location (next door versus five miles away) Style/type (minivan versus sedans) Quality (mpg) Consumer perception (advertising and branding)- Price-settingo 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 behavioro In the short-run Optimization when MR = MCo In the long-run When firms are profiting, there are incentives to enter the market When firms are losing, there are disincentives, and firms exit the market 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
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