Monopolistic Competition Quiz

Monopolistic competition of differentiated products that are not perfect substitutes

• Monopolistic competition is a type of imperfect competition with many producers competing against each other.
• Products sold by these companies are differentiated from one another, making them imperfect substitutes.
• Companies maintain spare capacity and ignore the impact of their own prices on the prices of other companies.
• Monopolistic competition falls into government-granted monopoly when in the presence of a coercive government.
• Models of monopolistic competition are often used to model industries such as restaurants, cereals, clothing, shoes, and service industries in large cities.
• The "founding father" of the theory of monopolistic competition is Edward Hastings Chamberlin.
• Monopolistically competitive markets have the following characteristics: product differentiation, many companies, freedom of entry and exit, independent decision making, market power, imperfect information, and inefficiency.
• MC companies sell products that have real or perceived non-price differences.
• There are many companies in each MC product group, giving each company a small market share.
• Each MC company independently sets the terms of exchange for its product.
• MC companies have some degree of market power, although relatively low, and face a downward sloping demand curve.
• Monopolistically-competitive companies are inefficient, foster advertising, and are allocative-inefficient.