monopolistic-competition

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Characteristics of Monopolistically Competitive Markets

A monopolistic market structure is one in which there are many firms offering a similar product but with some product differentiation
Examples include
- Nail salons, hairdressing or barber shops, massage parlours, fruit and vegetable stores

Diagram: Monopolistic Competition

Diagram of market structures, with arrows showing competition decreasing and concentration increasing from perfect competition to monopoly. — **Monopolistic competition should not be confused with a monopoly. As a market structure, it sits closer to perfect competition**

Characteristics of Monopolistic Competition

Characteristic	Explanation	Characteristic	Explanation
Nature of the product	The products are slightly differentiated This structure exists as consumers have different desires E.g. Two nail bars differentiate their product through express or pampered service – a relatively homogenous product has now been differentiated	Degree of efficiency	More competition pushes the firm to better efficiency Allocative efficiency in the long-run
Customer loyalty	Relatively low due to number of substitutes However, can also be relatively strong based on client/customer relationship, e.g loyalty to a specific hairdresser	Type of profit	Can be abnormal in the short-run Normal (breakeven) in the long-run
Price taker or maker?	Some price setting ability	Level of market power	There is a low degree of market power
Barriers to entry	There are low barriers to entry and exit from the industry Firms can start-up or leave the industry with relative ease, which increases the level of competition	Slope of the demand curve	Shallow (elastic) Same shape as monopoly revenue curves, but those are steeper (more inelastic)
Number of firms	There are a large number of small firms Each one is relatively small and can act independently of the market

Short-run Abnormal Profits in Monopolistic Competition

In order to maximise profit, firms in monopolistic competition produce up to the level of output where marginal cost = marginal revenue (MC=MR)
The firm can make abnormal profit in the short-run
The average revenue (AR) curve is the demand curve of the firm and it is downward sloping
- The firm has some market power due to the level of product differentiation that exists
  - To sell an additional unit of output, the firm will have to decrease its price
  - The marginal revenue (MR) curve will fall twice as quickly as the average revenue curve (AR)
A very good example of how this occurs can be seen in the barber shop industry
- Innovators may offer unique features such as free espressos, or child care while you wait
- This permits them to charge higher prices until such a point as competitors copy their innovative actions
- Their abnormal profit will then be eroded

Diagram: Short-run Profits for a Monopolistically Competitive Firm

3-4-3-supernormal-short-run-profit_edexcel-al-economics

Diagram analysis

The firm produces at the profit maximisation level of output, where MC = MR (Q₁)
- At this level, AR (P₁) > AC (C₁)
- The firm is making abnormal profit $begin mathsize 14px style equals space left parenthesis straight P subscript 1 space minus space straight C subscript 1 right parenthesis space cross times space straight Q subscript 1 end style$

Short-run Losses in Monopolistic Competition

Firms in monopolistic competition are able to make losses in the short-run

Diagram: Short-run Losses in Monopolistic Competition

<img alt=”Economic graph showing loss area. Curves include MC, AC, MR, and D=AR. Axes are quantity (Q) and costs/revenue/profit (£). Loss shaded in red.” data-nimg=”1″ decoding=”async” height=”654″ loading=”lazy” sizes=”(max-width: 320px) 320w, (max-width: 640px) 640w, (max-width: 960px) 960w, (max-width: 1280px) 1280w, 1920w” src=”https://cdn.savemyexams.com/cdn-cgi/image/f=auto,width=3840/https://cdn.savemyexams.com/uploads/2025/06/10863_httpscdn-savemyexams-comuploads2022073-4-3-short-run-losses-edexcel-al-economics.png” srcset=”https://cdn.savemyexams.com/cdn-cgi/image/f=auto,width=16/https://cd

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