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Monopolistic Competition with a Homogeneous Product

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In monopolistic competition, firms produce differentiated products. Moreover, in this Demonstration based on a numerical example found in [1], each one of the monopolistically competitive firms produces a homogeneous product with free entry and exit. The demand function is given by and the cost function is (where is fixed costs).

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The Demonstration shows the profits, the dead weight losses (DWL), and the average cost pricing for each representative monopolistically competitive firm, given a number of firms in the market and the fixed costs. As you can see, when the fixed costs increase, the long-run zero-profit equilibrium is sustainable with fewer firms.

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Contributed by: Christos Papahristodoulou (January 2014)
(Mälardalen University, Sweden)
Open content licensed under CC BY-NC-SA

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References

[1] D. Carlton and J. Perloff, Modern Industrial Organization, 4th ed., Boston: Pearson/Addison–Wesley, 2005.

[2] Wikipedia. "Monopolistic Competition." (Jan 13, 2014) en.wikipedia.org/wiki/Monopolistic_competition.

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