Market Structures 2: Monopolistic Competition
- Created by: TessAni
- Created on: 18-01-13 18:04
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- Monopolistic Competition
- A market structure with many firms producing a differentiated product and where there are few barriers to entry and exit
- Characteristics
- Firms are price makers because of product differentiation
- Product differentiation - minor variations
- Product differentiation - minor variations
- Large number of firms in the market but none particularly large
- Downward sloping demand curve that tends to be elastic
- Low barriers to entry
- Short term supernormal profits which attract firms - this profit is then competed away
- Non-price competiition
- Firms are price makers because of product differentiation
- Transport Relevance
- Supporters of deregulation believed that removal of barriers to entry in transport market would create monopolistic competition
- 1985 Transport Act worked briefly but has become less successful
- Areas of success in some bus markets - Manchester
- Best example: taxi provision - non-price competition and brand loyalty high
- Equilibrium
- Both S + LR price is greater than MC
- Despite competing away the sueprnormal profit allocative efficiency is still not achieved
- PE not being achieved (in either S/LR) operating above the minimum point on the AC curve
- This is called excess capacity
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