Chp. 16

In Chapter 16, Monopolistic Competition is the main topic. The chapter brings up Oligopoly which is a market structure in which only a few sellers offer similar or identical products. A Monopolistic competition is a market structure in which many firms sell products that are similar but not identical (characterized by many firms, differentiated products, and free entry. The equilibrium in a monopolistically comptetive market has excess capacity (operates on the downward-sloping portion of ATC) and each charges a price above marginal cost. In monopolistic competition, there is a standard deadweight loss (because of the mark up of price over marginal cost) and also the number of firms in the market can easily be two large or too small. Invisible hand does not ensure that the total surplus is maximized under monopolistic competition. Product-variety externality: because consumers get some consumer surplus from the introduction of a new product, entry of a new firm conveys a positive externality on consumers. Business-stealing externality: because other firms lose customers and profits from the entry of a new competitor, entry of a new firm imposes a negative externality on existing firms. Depending on whether a positive or negative externality is larger, a monopolistically competitive market could have either too few or too many products. And Advertising is a debated subject because some believe they are manipulative to one’s taste but others argue that it is used as a way to provide information to possible customers.