Question

Suppose that the market for shampoo can best be characterized as monopolistically competitive. If this is the case, should firms that operate in the market be prosecuted by antitrust authorities on account of the potential inefficiency of the market outcome? Explain why or why not.

Answer 1

NO, a firm operating in a monopolistic competitive market cannot be charged by the antitrust authorities on account of potential inefficiency.

In a monopolistic competitive market, there are a lot of firms operating in the same market with little-differentiated products. A large number of small firms selling products provide the consumers with a lot of variety of the same product but it also prevents the frim to operating at the full potential. As a number of different firms will also provide a differentiated product the market will be saturated and a firm can't sell more in that market which leads to excess capacity. they are not inefficient by choice but a large number of firms producing results in an excess capacity of the single firm. They just can't sell more products in the market.