MONOPOLISTIC COMPETITION

short and long runs
3. Product differentiation
4. Price discrimination

selling a differentiated product. How many is many?
So many

that no one firm has any significant influence over price. Although this is our working definition, monopolistic competitors do have some influence over price because their products are differentiated. But it's a very small influence.

Notice that the definition of monopolistic competition differs from that

of perfect competition only in that now we have a differentiated product.
You'll remember that under perfect competition, all the sellers sold an identical product.

the products are identical. If he or she does differentiate,

the product is then differentiated.

the monopolistic competitor can make a profit or take a

loss in the short run;

the firm will break even. The reason the monopolistic competitor

makes zero economic profits in the long run is the same as that under perfect competition.
In the long run, if firms are losing money, many will leave the industry, lowering industry supply and raising market price.
And if, in the long run, firms are realizing substantial profits, new firms will be attracted to the industry, thus raising supply and lowering market price. But we're getting ahead of ourselves since we're only beginning the short run.

competitor make zero economic profits in the long run.
The

monopolistic competitor charges a higher price and has a lower output than the perfect competitor and the perfect competitor is a more efficient producer than the monopolistic competitor.

fact, product differentiation is really what stands between perfect competition

and the real world. People differentiate among many similar products.
What makes one good or service differ from another? We need only for the buyer to believe it's different, because product differentiation takes place in the buyer's mind. In the real world, however, buyers generally do differentiate. We're always differentiating, and it doesn't have to be based on taste, smell, size, or even any physical differences among the products.

more elastic, or flatter, demand curve than the monopolist.

or more prices for the same good or service.

to distinguish between two or more separate groups of buyers.

In addition to distinguishing among separate groups of buyers, the price discriminator must be able to prevent buyers from reselling the product (i.e., stop those who buy at a low price from selling to those who would otherwise buy at a higher price).

(1) distinguish between at least two sets of buyers and

(2) prevent one set of buyers from reselling the product to another set.

conclusion, we would have perfect price discrimination. Every buyer in

the market would lose his entire consumer surplus in the process.

compete still more vigorously with respect to ambience, service, and

the rest of the intangibles that go along with attracting customers. To the degree that they're successful, they have gotten you to differentiate their product from all the others. That is what monopolistic competition is all about.