Lecture 18
MONOPOLISTIC COMPETITION

• Several sellers
• Freedom of entry and exit
• Perfect information
• Heterogenous products

2. Basis for product differentiation

1. Physical attributes of the product:
       "Where is the beef?"
2. Location:
       One gas station may be conveniently located
3. Type of service:
       One dry-cleaner offers 2-hour service, the other 1-day service
4. Perceived difference in quality:
       Quality of MOBIL's oil may be different from others

3. Why is product differentiation important?

• Each firm has some monopoly power in the market
• Each firm has a downward-sloping demand curve

4. Profit maximization under monopolistic competition

• Choice of optimal price and output combination
• Output is determined by MR=MC criterion
• Price is obtained from the demand curve

5. Profits

Short run:

• An individual firm may make profits

Long run:

• Demand curve is tangent to the AC curve
• Firms make zero profits (Why?)