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Explain the difference between a monopolistically competitive market and a perfectly competitive market in terms of...

Explain the difference between a monopolistically competitive market and a perfectly competitive market in terms of the immediate consequence of entry by new firms.     

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Expert Solution

Both market structures (monopolistically competitive market and a perfectly competitive ) have many firms in the market and entry is easy for any other competitive firm.

However, perfect competition is price taker and product is homogeneous and monopolistically competitive firm is price maker as its product is differentiated.

When they have positive profits then other firms are attracted towards the market.

In a perfect market any new firm will have to take price that currently market is offering. In monopolistic market firm can decide own price depending upon product features even at the time of entry.

Demand curve even after new entry in Perfect competition will remain horizontal and in monopolisticaly competitive it will remain downward sloping.

In perfect competition, new firms will produce at productive and allocative efficiency which monopolisic companies will not be able to achieve.

Rahul Sunny answered 1 year ago
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