Monopolistic Competition
Market Failure: Market Power
AO2·AO3·AO4·Diagram required·HL
Syllabus requirement
Many firms, product differentiation, free entry. Firms face a more elastic demand curve. Profit outcomes vary between short and long run. Less inefficiency, more variety.
Assessment objectives
AO2 Application and AnalysisAO3 Synthesis and EvaluationAO4 Use of Appropriate Skills
Required diagram: Collusive oligopoly acting as a monopoly. Diagram of a monopolistically competitive firm in the short run showing abnormal profit or losses, and in the long run showing normal profit. Demand curve should be more elastic than that of a monopoly.
Higher LevelThis topic is assessed at HL.
Summary
Monopolistic competition is a market structure with many firms, each having some market power because of product differentiation and many close substitutes. Firms can earn abnormal profit or losses in the short run but, because entry and exit are free, they earn normal profit in the long run; their demand curves are downward sloping and more elastic than a monopoly's. This market structure causes allocative inefficiency (P > MC) and excess capacity, but it also delivers product variety and incentives for differentiation.
