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In: Economics

What might happen to the number of sellers/competitors or the size of a typical seller if...

What might happen to the number of sellers/competitors or the size of a typical seller if the number of customers doubled? Or fell?

Why are markets characterized by monopolistic competition less efficient than those characterized by perfect competition? What are the benefits of product differentiation and are they worth the costs in terms of loss of production and allocation efficiency?

Solutions

Expert Solution

If the number of customers doubled then the market size increases. The size of the typical seller depends on the power of that seller. If the seller has significant market power then he will capture all the extra market also. If the market is competitive then the number of sellers would increase or the extra market share would be shared between the players. The converse would happen if the sellers fell in number.

Under perfect competition, the firms operate where p=mc and firms make no profits in the long run and firms have no bargaining power and there is no product differentiation. In case of monopolistic competition there is product differentiation and so greater inefficiency. production is below the social optimal. Product differentiation helps in gaining market share in oligopolistic markets in particular. They are worth the cost if the gain in revenue from them outweighs any potential costs.

Rahul Sunny answered 1 year ago
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