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Monopolistic Competition

- many firms creating differentiated products - characterized by a large number of firms and low entry barriers - entry to the industry is more difficult than under pure competition, but not nearly as difficult as under pure monopoly - it's model assumes that firms will engage in non-price competition

Non-price Competition

- refers to advertising product promotion and changes in the real or perceived characteristics of a product

Monopolistic Competitive Firms

- have a highly elastic demand curve - may realize either profits or losses in the short run, but realize normal profits in the long run - in the short run, profit maximizing firms sets it's price above marginal cost - in the long run, a profit maximizing firm sets it's price above marginal cost and will be equal to average total cost (ATC)

In a Monopolistic Competitive Market

- new firms will enter industry until economic profits are zero - industries are inefficient because they are over populated with firms whose plants are under utilized -- the economic inefficiencies may be offset by the fact that consumers have a number of variations of the product from which to choose

Excess Capacity

- refers to the amount by which actual production falls short of the minimum ATC output Oligopoly = - indicates a few firms either differentiated or homogenous products - industries are characterized as a few dominate firms and substantial entry barriers - difficult to analyze primarily because the price and output decisions for any one firm depend on the reactions of it's rivals

Homogeneous Oligopoly

- exist where a small number of firms are producing virtually identical products

Examples of Homogeneous Oligopoly

the copper, aluminum, cement, and industrial alcohol industries

Differentiated Oligopoly

- exist where a small number of firms are producing goods that differ in terms of quality and design Examples of Differentiated Oligopoly = - automobile, household appliance, and automobile tire industries

Mutual Interdependence

each oligopolistic firm must consider the reactions of it's rivals when it determines it's price policy

Inter-industry Competition

in some markets the producers of a particular product might face competition from products produced by other industries


- The likelihood of being successful is greater when cost and demand curves of various participants are very similar - Is difficult to maintain in the long run because individual members may find it profitable to cheat on agreements - in the US, are in violation of the antitrust laws

Price War

a breakdown in price leadership leading to a successive round of price cuts


- can enhance economic efficiency when it expands sells such that firms experience substantial economies of scale - can impede economic efficiency when it increases entry barriers

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