Monopolistic+Competition+-&nbsp;Be+able+to+apply+the+model

Monopolistic competition is a common market form. Many markets can be considered as monopolistically competitive, often including the markets for restaurants, books, clothing and films. = =

Definition
Monopolistic competition refers to a market that has many sellers possessing relatively small market shares, a product that is somewhat differentiated across firms, no barriers to entry, and some slight imperfections concerning consumer information. Numerous sellers and no entry barriers imply that a single monopolistically competitive firm may also lack market power. However, a monopolistically competitive firm may gain some power over output and price in a niche market because of its differentiated product.

The characteristics of a monopolistically competitive market are almost exactly the same as in perfect competitionwith the exception of heterogeneous products, and that monopolistic competition involves a great deal of non-price competition (based on subtle product differentiation). This gives the company a certain amount of influence over the market; it can raise its prices without losing all the customers, owing to brand loyalty. This means that an individual firm's demand curve is downward sloping, in contrast to perfect competition, which has a perfectly elastic demand schedule.

Monopolistic Competition and Product Differentiation
The product differentiation may result from a preferred location, different levels of quality, or advertising and other promotional strategies. Because of product differentiation, each firm faces a downard-sloping demand curve that is highly elastic. Since the demand curve is downward sloping, the monopolistically competitive firm has some limited ability to raise price without losing all of its sales. Product differentiation leads to a certain degree of brand loyalty and that is why the individual firm can raise price and continue to sell output. Everything held equal, a more differentiated product translates into a less elastic demand curve facing the monopolistically competitive firm.

Real Life Example
We have monopolistic competition when a group of firms sell closely related, but not homogenous products. Instead, the products are said to be differentiated products. To re-cap, the characteristics of monopolistic competition are:
 * Many buyers and sellers
 * Differentiated products
 * Sufficient knowledge
 * Free entry

For example we may think of the hairdressing industry. There are many hairdressers in the country and most hairdressingsalons are quite small. There is free entry, but the products of different hairdressers are not perfect substitutes. At the very least, their services are differentiated by location. A hairdresser in Munice, Indiana is not a perfect substitute for a hairdresser in Hollywood, California. Their styles may be different; the decor of the salon may be different, and even the quality of the conversation may make a difference. Some economists have avoided any reference to industries in dealing with monopolistic competition. Instead they talk about "product groups." A product group is a group of firms selling products that are "good," but not necessarily "perfect" substitutes.

Questions
1. A monopolistically competitive firm faces a down-ward sloping demand curve because of: a. statistical analysis b. long-run economies of scale c. product differentiation d. the structure of the pharmacuetical industry (ANSWER: D)

2. Product differentiation may result from: a. preferred location b. different levels of quality c. better advertising or promotional strategies d. all of the above (ANSWER: D)