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Monopolistic Competition market structure essay plan
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Essay plan/structure for an essay on the topic of the monopolistic competition market structure
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Introduction:- What is Monopolistic Competition: There are many sellers that compete with each other to
sell their goods & services but each seller can influence the price they charge for their goods
and services hence the structure has similarity to both monopoly and perfect competition
- Market Structure:
1. Many Buyers, who are all informed of prices
2. Many small sellers: hence they do not respond to each other’s’ output choices as there
are lots of them in the market
3. Low Barriers to entry
4. Differentiated products
- Two forms of product differentiation
- Define Horizontal differentiation: quality is the same, but the best depends on tastes
- Define Vertical differentiation: different quality
Main Body:
- They have this ‘market power’ because: their products are differentiated, so they are
imperfect substitutes for each other hence a firm can set a high price without losing all of its
customers to low-priced rivals
- Assumptions of Monopolistic Competition:
1. Buyers are price taker:
2. Buyers and Sellers have complete info:
3. Sellers are price makers: Seller sells more at lower price (D curve is hence downward
sloping) and seller’s output choice doesn’t trigger a reaction in rivals; same as monopoly
4. Entry is free: A potential seller can enter the market in the long run without incurring
costs that an incumbent seller would not incur. Entry is a LR decision in which all factors
of production are variable; same as perfect competition
- Short run equilibrium in Monopolistic Competition:
- D curve (AR) is -ve sloped as
we’ve assumed the seller is a
price maker hence needs to
lower the price to sell more
- Increasing the number of
sellers affects the D curve as
more sellers means less
buyers to go round; hence
more sellers will shift AR to
the left as AR is a function of
n i.e. no. of firms
- Seller’s D curve is more
elastic than market D curve
as in the Seller’s case we are
holding other influences
constant when considering a
change in price however with market diagram a price change is a change for the whole
market
- Sellers Demand will have more close substitutes to go to in case of a price rise and hence the
D is more elastic
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