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Consider the monopolistic competition market structure. What does it have in common with a pure monopoly...

Consider the monopolistic competition market structure. What does it have in common with a pure monopoly market structure? What does it have in common with a perfectly competitive market structure?

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Answer #1

(a) A monopolistic competitive market and a pure monopoly market have following common features.

(1) Firms in both markets faces a downward sloping demand curve with marginal revenue (MR) curve lying below demand curve.

(2) Firms maximize profit by equating MR and MC, therefore Price is higher than MC, giving rise to deadweight loss.

(3) Firms can earn positive profit in short run.

(4) There are many buyers in the market.

(b) A monopolistic competitive market and a perfectly competitive market have following common features.

(1) Entry and exit are free.

(2) In the long run equilibrium, each firm earns zero economic profit (or incurs zero economic loss).

(3) There are many sellers.

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