A monopolistic competition is a type of market in which many firms produce the same but differentiated product.

economics

Description

Monopolistic 


Competition A monopolistic competition is a type of market in which many firms produce the same but differentiated product. Then, in some sense they are monopolies of their own good, but they share the consumers. This type of market shares many properties with that of perfect competition, for example, the freedom to enter or exit, but in this case the firms do have a (low) market power and can set the price. 


Now, in monopolistic competition the market behaves (approximately) as a monopoly in the short run and as a perfect competition in the long run, when the demand function is shifted due to firms entering or exiting the market and price slope may decrease, leading to a zero profit situation. 


Case 


Suppose two different companies, Future Films (A) and Endless Images (B) that want to enter in the film industry, and they have separately estimated that their fixed costs are of K€400 and, K€300 respectively. Also, depending on the number of films they are able to produce (some low cost and some high cost) in one year you, they have estimated the selling prices in the short run (SR Price) and in the long run (LR Price) as well as the variable costs that you see in the table below. 

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