Question

What are three examples of monopolistic competition )four firm concentration ratios of 20 to 40 percent)?
Which characteristics of monopolistic competition described in the text are true for each example?

Answer 1

The first example is the presence of large number manufacturers, but they differentiate in their products on offer. It can be observed in the different product segments in the FMCG industry. For different types of consumers, different specific products such as toothpaste is available. The second example is the mobile handset industry that thrives on patented designs, quality and control on pricing. For example, iPhone manufacturer has control over the price even if there is a many manufacturers. The third example is the restaurant industry that offers zero economic profit in the long run. When these restaurant industry earns profit in the short run, then many other restaurants also open up that drive the demand curve in such a way that ATC curve becomes tangent to it in the long run. So, economic profit becomes zero in the long run.

The characteristics of free entry and exit with product differentiation is applied in the first example. The characteristics of control upon the price is applied on the second example where Apple makes value based pricing for products like the iPhone. The characteristics of zero economic profit is applied in the third example of the restaurant business.