Question

Monopolistic competition is the most common market structure in industrialized countries, characterized by many sellers, with each selling a differentiated product in a market that is relatively easy to enter.  

Describe two different aspects in which a monopolistically competitive firm behaves like a perfectly competitive firm.

Must be thorough and at least 12 sentences.

Answer 1

Both monopolistically competitive firm and perfectly competitive firm have no entry and exit barriers. Because the startup cost is low, entry is relatively easier, and for the same reason, firms facing serious economic losses can easily leave the market. Similarly when there are positive economic profits in the short run, even small size firm can enter the market because there are no entry barriers.

The implication from the first feature, is reflected in the the inability of existing firms to continue to earn economic profits in the long run as well. This is because whenever there are economic profits in the short run, new firms start entering the market in the long run and the continue to enter till all the economic profits are vanished. Same is the case with economic losses, where was continue to exit the market. Eventually those who are left in the market are able to earn only normal profit. This is true for both monopolistically competitive markets and perfectly competitive markets