Question

Critically evaluate and explain:

a. Compared to pure monopoly and pure competition, monopolistically competitive industries.

b. In the long run, monopolistic competition leads to a monopolistic price but not to monopolistic profits.

Answer 1

Monopolistically competitive market is like a pure competition in terms of the number of participants. In monopolistic competition too there are many producers who produce more or less same things with little variation and try to prove their variation is significant enough to have them more market share at higher prices. This is not the case in perfect competition in perfect competition, in perfect competition firms compete with each other over close substitutes and lower their prices in order to attract more customers.

Monopoly has single seller and monopolistic competition has at least two. Firms in monopolistic competition have to compete with one another whereas in monopoly the single firm has sole rights over all factors of production as well as the final price.

B. The statement is true. In long term close substitutes enters the market and in order to compete with those the price of the average firm is brought down to be equal to ATC. Thus they do not get any economic profit. However firm produces where its monopolistically downward sloping demand curve is tangent to ATC curve and thus at the price which is higher than purely competitive price, which is the monopolistic price.