Monopolistic Competition Markets

Monopolistic Competition Markets

A monopolistically competitive market is different from a perfectly competitive market in a number of ways. In perfectly competitive markets, firms sell the exact same product, it is relatively easy to enter the market, and although the firm might make an economic profit in the short run, the firm will definitely make zero economic profit in the long run. In a monopolistically competitive market firms sell differentiated products; it is still relatively easy to enter the market, and again, the firm might make an economic profit in the short run, but zero economic profit in the long run. However, in monopolistic competition, the firm has the possibility of making an economic profit in the long run as well and will strive to achieve this profit. Also, although in monopolistic competition price is still elastic, firms have a little more control over the prices they set.
Many monopolistic firms will experience an economic profit in the short run. For example, Susan might notice that there are no restaurants in her area that sale Cajun food and so she decides to start one. When Susan first opens the restaurant, she ends up with a lot of customers, and her restaurant becomes quite popular. During this time Susan experiences a large amount of economic profit. The product her restaurant is selling is differentiated from the products of the other restaurants around her and this creates more business for Susan. However, over time other restaurants want a piece of the economic profit action Susan is experiencing, and so start offering Cajun dishes on top of their other menu items at their restaurants, and at a lower price than what Susan’s dishes sell for. Susan starts losing some of her customers that were only dining at her restaurant for the Cajun dishes, and therefore starts to lose some of her economic profit. Also, a few other people start Cajun restaurants in the same area as Susan, evening out the Cajun restaurant competition in the area. In the end,...

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