Editing Monopolistic competition (section)

==Problems==
Monopolistically-competitive companies are inefficient, it is usually the case that the costs of regulating prices for products sold in monopolistic competition exceed the benefits of such regulation.<ref name=":0">{{Cite web|url=https://www.cbsnews.com/news/whats-so-bad-about-monopoly-power/|title=What's so bad about monopoly power?|website=www.cbsnews.com|date=18 September 2014 |language=en-US|access-date=2019-04-03}}</ref> A monopolistically-competitive company might be said to be marginally inefficient because the company produces at an output where average total cost is not a minimum. A monopolistically competitive market is a productively inefficient market structure because marginal cost is less than price in the long run. Monopolistically-competitive markets are also allocative-inefficient, as the company charges prices that exceed marginal cost. Product differentiation increases total utility by better meeting people's wants than homogenous products in a perfectly competitive market.<ref name=":0"/>

Another concern is that monopolistic competition fosters [[advertising]]. There are two main ways to conceive how advertising works under a monopolistic competition framework. Advertising can cause either a company's perceived demand curve to become more inelastic or demand for the company's product to increase. In either case, a successful advertising campaign may allow a company to sell a greater quantity or to charge a higher price, or both, and thus increase its profits.<ref>{{cite web|title=Reading: Advertising and Monopolistic Competition {{!}} Microeconomics|url=https://courses.lumenlearning.com/suny-microeconomics/chapter/how-advertising-impacts-monopolistic-competition/|access-date=2020-11-01|website=courses.lumenlearning.com}}</ref> This allows the creation of [[brand names]]. Advertising induces customers into spending more on products because of the name associated with them rather than because of rational factors. Defenders of advertising dispute this, arguing that brand names can represent a guarantee of quality and that advertising helps reduce the cost to consumers of weighing the trade-offs of numerous competing brands. There are unique information and information processing costs associated with selecting a brand in a monopolistically competitive environment. In a monopoly market, the consumer is faced with a single brand, making information gathering relatively inexpensive. In a perfectly competitive industry, the consumer is faced with many brands, but because the brands are virtually identical information gathering is also relatively inexpensive. In a monopolistically competitive market, the consumer must collect and process information on a large number of different brands to be able to select the best of them. In many cases, the cost of gathering information necessary to selecting the best brand can exceed the benefit of consuming the best brand instead of a randomly selected brand. The result is that the consumer is confused. Some brands gain prestige value and can extract an additional price for that.

Evidence suggests that consumers use information obtained from advertising not only to assess the single brand advertised, but also to infer the possible existence of brands that the consumer has, heretofore, not observed, as well as to infer consumer satisfaction with brands similar to the advertised brand.<ref name="davies">{{cite journal|author=Antony Davies & Thomas Cline|year=2005|title=A Consumer Behavior Approach to Modeling Monopolistic Competition|journal=Journal of Economic Psychology|volume=26|pages=797–826|doi=10.1016/j.joep.2005.05.003|issue=6}}</ref>