Question

Discuss the similarities and differences of a monopolistic competitive market place relative to a perfectly competitive one and to a monopoly. Give a realistic example of a market with differentiated products, and how these consumers respond to changes in this market.

Answer 1

Answer -

Similarities -

1 - Both the competitive firm and monopolistic firm have large number of buyers and sellers

2 - Both the markets have no barriers to entry and exit of the firms in market

3 - Both the firms earn the normal or the zero economic profits in the long run.

Differences -

1 - In monopolistic competition , the products are differentiated whereas in perfect competition , products are homogenous.

2 - Monopolistic products are close substitutes and competitive products are perfect substitutes

3 - Monopolistic firm can price discriminate whereas competitive firm cannot.

4 - Monopolistic firm is price searcher and competitive firm is price taker.

Suppose there is a market for the Restaurants. The food in each restaurant is same but the taste is different. There is some difference in the ingredients used in each restaurant. Also the service quality is different . As a result of this , the restaurants will charge different prices as per the quality of food and services. The customers here cannot completely substitute one restaurant to other.