Editing Monopolistic competition (section)

==Characteristics==
There are eight characteristics of monopolistic competition (MC):
*Firms are price setters
*Free movement of resources from one firm to another
*[[Product differentiation]]
*Many companies
*[[Free entry|Freedom of entry and exit]]	
*Independent decision making
*Some degree of market power
*Buyers and sellers do not have perfect information<ref>{{cite book|last1=Goodwin|first1=N.|last2=Nelson|first2=J.|last3=Ackerman|first3=F.|last4=Weisskopf|first4=T.|title=Microeconomics in Context|edition=2nd|page=317|publisher=Sharpe|year=2009|isbn=978-0-7656-2301-0}}</ref><ref>{{cite book|last=Hirschey|first=M.|title=Managerial Economics|edition=Rev.|page=443|publisher=Dryden|location=Fort Worth|year=2000|isbn=0-03-025649-6}}</ref>

===Product differentiation===
MC companies sell products that have real or perceived non-price differences. Examples of these differences could include physical aspects of the product, location from which it sells the product or intangible aspects of the product, among others.<ref>{{Citation|last=Klingensmith|first=J. Zachary|title=Monopolistic Competition|date=2019-08-26|url=https://psu.pb.unizin.org/introductiontomicroeconomics/chapter/chapter-9-monopolistic-competition/|work=Introduction to Microeconomics|publisher=Affordable Course Transformation: The Pennsylvania State University|language=en|access-date=2020-11-01}}</ref> However, the differences are not so great as to eliminate other goods as substitutes. In technical terms, the [[cross price elasticity of demand]] between goods in such a market is large and positive.<ref name="Krugman 2009">{{cite book|last1=Krugman|last2=Wells|title=Microeconomics|edition=2nd|location=New York|publisher=Worth|year=2009|isbn=978-0-7167-7159-3}}</ref> MC goods are best described as close but imperfect substitutes.<ref name="Krugman 2009"/> The goods perform the same basic functions but have differences in qualities such as type, style, quality, reputation, appearance, and location that tend to distinguish them from each other. For example, the basic function of motor vehicles is the same—to move people and objects from point to point in reasonable comfort and safety. Yet there are many different types of motor vehicles such as motor scooters, motor cycles, trucks and cars, and many variations even within these categories.

===Many companies===
There are many companies in each MC product group and many companies on the side lines prepared to enter the market. A product group is a "collection of similar products".<ref>{{cite book|last1=Samuelson|first1=W.|last2=Marks|first2=S.|page=379|title=Managerial Economics|url=https://archive.org/details/isbn_9780470000410|url-access=registration|edition=4th|publisher=Wiley|year=2003|isbn=0-470-00044-9}}</ref> The fact that there are "many companies" means that each company has a small market share.<ref>{{cite web|title=Imperfect Competition: Monopolistic Competition and Oligopoly|url=http://www2.harpercollege.edu/mhealy/eco211/lectures/impcomp/impcomp.htm|access-date=2020-11-01|website=www2.harpercollege.edu}}</ref> This gives each MC company the freedom to set prices without engaging in strategic decision making regarding the prices of other companies (no mutual independence) and each company's actions have a negligible impact on the market. For example, a company could cut prices and increase sales without fear that its actions will prompt retaliatory responses from competitors.

The number of companies that an MC market structure will support at market equilibrium depends on factors such as fixed costs, [[economies of scale]], and the degree of product differentiation. For example, the higher the fixed costs, the fewer companies the market will support.<ref>{{cite book|last=Perloff|first=J.|title=Microeconomics Theory & Applications with Calculus|page=485|location=Boston|publisher=Pearson|year=2008|isbn=978-0-321-27794-7}}</ref>

===Freedom of entry and exit===
Like perfect competition, under monopolistic competition also, the companies can enter or exit freely. The companies will enter when the existing companies are making super-normal profits. With the entry of new companies, the supply would increase which would reduce the price and hence the existing companies will be left only with normal profits. Similarly, if the existing companies are sustaining losses, some of the marginal firms will exit. It will reduce the supply due to which price would rise and the existing firms will be left only with normal profit.

===Independent decision-making===
Each MC company independently sets the terms of exchange for its product.<ref name="ColanderDavid">{{cite book|last=Colander|first=David C.|title=Microeconomics|edition=7th|page=283|location=New York|publisher=McGraw-Hill/Irwin|year=2008|isbn=978-0-07-334365-5}}</ref> The company gives no consideration to what effect its decision may have on its competitors.<ref name="ColanderDavid"/> The theory is that any action will have such a negligible effect on the overall market demand that an MC company can act without fear of prompting heightened competition. In other words, each company feels free to set prices as if it were a monopoly rather than an oligopoly.

===Market power===
MC companies have some degree of market power, although relatively low. Market power means that the company has control over the terms and conditions of exchange. All MC companies are price makers. An MC companies can raise its prices without losing all its customers. The company can also lower prices without triggering a potentially ruinous price war with competitors. The source of an MC company's market power is not barriers to entry since they are low. Rather, an MC company has market power because it has relatively few competitors, those competitors do not engage in strategic decision making and the companies sells differentiated product.<ref>{{cite book|last=Perloff|first=J.|title=Microeconomics Theory & Applications with Calculus|page=483|location=Boston|publisher=Pearson|year=2008|isbn=978-0-321-27794-7}}</ref> Market power also means that an MC company faces a downward sloping demand curve. In the long run, the demand curve is highly elastic, meaning that it is sensitive to price changes, although it is not completely "flat". In the short run, economic profit is positive, but it approaches zero in the long run.<ref>{{cite web|author=Investopedia Staff|title=Monopolistic Competition Definition|url=https://www.investopedia.com/terms/m/monopolisticmarket.asp|access-date=2020-11-01|website=Investopedia|language=en}}</ref>

===Imperfect information===
No other sellers or buyers have complete market information, like market demand or market supply.<ref>{{cite book|last1=Goodwin|first1=N.|last2=Nelson|first2=J.|last3=Ackerman|first3=F.|last4=Weisskopf|first4=T.|title=Microeconomics in Context|edition=2nd|page=289|publisher=Sharpe|year=2009|isbn=978-0-7656-2301-0}}</ref>

{| class="wikitable"
|+''' Market structure comparison'''
|-
! style="background:#efefef;" |Market Structure
! style="background:#efefef;" | Number of firms
! style="background:#efefef;" | Market power
! style="background:#efefef;" | Elasticity of demand
! style="background:#efefef;" | Product differentiation
! style="background:#efefef;" | Excess profits
! style="background:#efefef;" | Efficiency
! style="background:#efefef;" | [[Profit maximization]] condition
! style="background:#efefef;" | Pricing power
|-
| [[Perfect competition]]
|  Infinite
|  None
|  Perfectly elastic
|  None
|  Short term yes, long term no
|  Yes<ref>{{cite book |last1=Ayers |first1=R. |last2=Collinge |first2=R. |title=Microeconomics: Explore & Apply |pages=224–225 |publisher=Pearson |year=2003 |isbn=0-13-177714-9 }}</ref>
|  P=MR=MC<ref name="Perloff, J page 445">{{cite book |last=Perloff |first=J. |title=Microeconomics Theory & Applications with Calculus |page=445 |location=Boston |publisher=Pearson |year=2008 |isbn=978-0-321-27794-7 }}</ref>
|  Price taker<ref name="Perloff, J page 445"/>
|-
|  Monopolistic competition
|  Many
|  Low
|  Highly elastic (long run)<ref>{{cite book |last1=Ayers |first1=R. |last2=Collinge |first2=R. |title=Microeconomics: Explore & Apply |page=280 |publisher=Pearson |year=2003 |isbn=0-13-177714-9 }}</ref>
|  High<ref>{{cite book |last1=Pindyck |first1=R. |last2=Rubinfeld |first2=D. |title=Microeconomics |edition=5th |page=[https://archive.org/details/microeconomics00pind_0/page/424 424] |location=London |publisher=Prentice-Hall |year=2001 |isbn=0-13-030472-7 |url=https://archive.org/details/microeconomics00pind_0/page/424 }}</ref>
|  Short term yes, long term no<ref>{{cite book |last1=Pindyck |first1=R. |last2=Rubinfeld |first2=D. |title=Microeconomics |edition=5th |page=[https://archive.org/details/microeconomics00pind_0/page/425 425] |location=London |publisher=Prentice-Hall |year=2001 |isbn=0-13-030472-7 |url=https://archive.org/details/microeconomics00pind_0/page/425 }}</ref>
|  No<ref>{{cite book |last1=Pindyck |first1=R. |last2=Rubinfeld |first2=D. |title=Microeconomics |edition=5th |page=[https://archive.org/details/microeconomics00pind_0/page/427 427] |location=London |publisher=Prentice-Hall |year=2001 |isbn=0-13-030472-7 |url=https://archive.org/details/microeconomics00pind_0/page/427 }}</ref>
|  MR=MC<ref name="Perloff, J page 445"/>
|  Price setter<ref name="Perloff, J page 445"/>
|-
| [[Monopoly]]
|  One
|  High
|  Relatively inelastic
|  Absolute (across industries)
|  Yes
|  No
|  MR=MC<ref name="Perloff, J page 445"/>
|  Price setter<ref name="Perloff, J page 445"/>
|}