Monopolistic Competition

Monopolistic competition describes a market wherein many firms are selling a differentiated product and wherein entry into and exist from the industry is easy (not costly). The differentiated product characteristic means that the firms competing within the market provide products that are essentially substitutes for one another. Thus, firms in the market tend to compete on the bases of price, product quality, and marketing initiatives. The ease of market entry and exit, which leads to a market with many competitors, means that the competing firms do not depend upon one another. An oligopolistic market, in contrast to a monopolistically competitive market, is one that is characterized by a small number of competing firms whose product and marketing decisions are highly interdependent with similar decisions made by their competitors. An oligopolistic market may be one with either (a) differentiated products or (b) non-differentiated products. In either instance, however, because a small number of firms dominate the market, firms are highly dependent on the behavior of their competitors in the market. It is costly for firms to enter an oligopolistic market, and because of high entry costs, exit costs also tend to be high.

2. In a monopolistically competitive market, long-run profits are zero. The long-run equilibrium for a monopolistically competitive market is a situation wherein price equals total cost at equilibrium output, but wherein price is higher than marg

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its own price choice and the other firm's capacity, which is parametric. The random queue is generated by letting the fraction of consumers left to the higher priced firm be a random sample of the population.� The residual demand under the random queue yields greater potential profit to the high-price seller.� Thus the incentive for price-cutting deteriorates with the random queue as compared to the value queue. Within a Bertrand oligopolistic market, long-run profit is zero, as is the case in a monopolistically competitive market. In contrast with the Bertrand oligopolistic model, in the Cournot oligopolistic model, Company A assumes that Company B's output will be unaffected by Company A's own output; both companies will adjust prices and output until a state of equilibrium is reached at some point between the levels reached under conditions of monopoly and perfect competition at the polar extremes. In this model of oligopolistic competition, it is possible for a competitor to earn a long-run profit, but earning a profit over the long-term in a Cournot oligopoly is not assured. 3. Oligopolistic competitors, in either a Bertrand or a Cournot market structure, do not typically achieve productive efficiency, but such performa

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