Chapter 16 Blog

In this chapter, the concept of the monopolistically competitive market is introduced. A monopolistically competitive firm is similar to a perfectly competitive firm in that there are many firms in the market and free entry and exit, however it differs from a perfectly competitive market in that its firms sell differentiated products. While the equilibrium in a monopolistically competitive market is similar to that of a monopolistic market in that it has a profit maximizing position where marginal cost is equal to marginal revenue, it differs from both monopolies and perfectly competitive firms in many ways. It is different from a perfectly competitive market because it has excess capacity, meaning it operates on the downward sloping section of the average total cost curve. Additionally, there is a markup from price to marginal cost, meaning that price is greater than marginal cost. One way that monopolistic competition is less desirable than perfect competition is that in a monopolistically competitive firm, like in a monopoly, has a deadweight loss associated with the markup from marginal cost to price. Also, based on different positive and negative externalities associated with monopolistically competitive firms, there may be too many or too little. Because of this, policy makers cannot correct any inefficiencies in monopolistically competitive markets because every firm sells a slightly different product. Another thing to consider within monopolistically competitive markets is the prevalence of advertising, which is present because of the differentiation of products within monopolistically competitive markets. This can influence consumer decisions greatly.