Question

In the monopolistic competition model, would you expect prices to be higher or lower as the number of firms increases? Briefly explain why.

Answer 1

Monopolistic competition is a type of imperfect competition where there is a large number of buyers and sellers of the products. The products of this type of competition are differentiated from one another in the way of brands, quality and so on.

With more firms entering such type of competition, the amount of profit earned by each firm will go on decreasing. This is because the competition among the firms will increase with more firms entering and for this reason, the firms will try to cut down their costs and reduce prices to survive in the competition. So prices will decrease as the number of firms will increase.