ECO-4 Lecture Notes - Lecture 26: Monopolistic Competition, Perfect Competition, Demand Curve

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Firms compete on product quality, price & marketing. Firms are free to enter and exit the industry. Ignore other firms limited power to influence price of product. Each firm supplies small part of total industry output each firm only has. Each firm can only deviate from avg price of other firm by a small amount. Firm must be sensitive to avg market price but firm does not pay attention to. No one firm can dictate market conditions & no one firm"s actions directly any one individual competitor affect the actions of other firms. Firms in monopolistic competition want to be able to conspire to fix a higher price but it is difficult to coordinate and collusion is not possible b/c there"s a large number of firms. Firm practices product differentiation if it makes a product that is slightly different from the products of competing firms. Differentiated product : close substitute but not perfect substitute for the products of other firms.

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