ECON 208 Lecture Notes - Lecture 18: Nash Equilibrium, Oligopoly, Monopolistic Competition

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ECON 208- Lecture 18- Chapter 11 cntd.
11.3 Monopolistic Competition
The Assumptions of Monopolistic Competition
1. Each firm produces one variety of the differentiated product. Thus, it faces negatively
sloped and highly elastic demand curve
2. All firms have access to the same technology and thus have the same cost curves
3. The industry contains so many firms that each one ignores competitors when making
price and output decisions.
4. Firms are free to enter and exit the industry
Empirical Relevance of Monopolistic Competition
The theory of monopolist competition is useful for analyzing industries with low
concentration rations and differentiated products:
Restaurants
Clothing
Hairstyles
Mechanics
Predictions of the Theory
Profit Maximization for a firm in Monopolistic Competition
 In the short run, a monopolistically competitive firm faces a downward sloping demand
curve and maximizing profits by equating MR and MC
(i) A typical firm in the short run
 In the short run, it is possible for the firms to make positive profits, break even, or even
to make losses
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