16-1 Between Monopoly and Perfect Competition

• Oligopoly: a market structure in which only a few sellers offer similar or identical products.

• Monopolistic competition: a market structure in which many firms sell products that are similar but not identical.

• Many firms compete against one another for the same group of customers, creating a surplus of sellers.

• Firms can freely enter and exit markets without restrictions and produce slightly different products from those of other firms.

16-2 Competition with Differentiated Products

The Monopolistically Competitive Firm in the Short Run

• A monopolistically competitive run can choose its quantity and price, similar to a monopoly. It also is shown as a downward-sloping demand curve on a graph.

• Profit maximization rules are also used in a monopolistically competitive run.

The Long-Run Equilibrium

• As soon as firms begin making a profit, new firms gain an incentive to enter the market.

• Customers lose their variety of products to choose from as firms exit, increasing the demand faced by those firms, and continuing until each firm makes zero economic profit.

Monopolistic versus Perfect Competition

• Excess capacity and markups separate monopolistic and perfect competitions.

• Under monopolistic competition, firms have excess capacity.

• In a perfectly competitive firm, the price will equal the marginal cost. In a monopolistic competitive firm, the price exceeds the marginal cost.

Monopolistic Competition and the Welfare of Society

• The product-variety externality tells us that the entry of a new firm confers a positive externality on consumers because consumers get a surplus from introducing a new product. On the other hand, business-stealing externalities cause negative externalities to be imposed on existing firms with the entry of a new firm, since other firms are prone to losing customers and profits when a new competitor is present.

16-3 Advertising

The Debate over Advertising

• Some people argue that advertising manipulates people's tastes and opinions, causing psychological effects. Other critics believe that advertising impedes competition, attempting to make similar products stand out from one another to gain more profit.

• On the bright side, advertising can provide vital information to customers by conveying the price and all else that the product has to offer. Advertising could also foster competition, allowing new firms to enter and exit.

Advertising as a Signal of Quality

• The advertisement's existence and expense could determine how well the advertisement sells. Cheap advertising with little to no information is often overlooked.

• If an advertisement includes a celebrity, people are more likely to remain attentive.

Brand Names

• Some firms sell products with well-known brand names, while others sell generic brands, considered to be substituted.

• Some say that brand names lead consumers to think about nonexistent differences.

• Brands can provide consumers with information and/or incentives.

16-4 Conclusion

• Monopolistic competition is indeed a mix of monopoly and competition.

• This competition helps describe how markets function in the economy but it can often be perceived as flawed.

• Advertising can create irrational brand loyalty and impede competition.