ECON 1000 Lecture Notes - Lecture 16: Externality, Monopolistic Competition, Deadweight Loss
Document Summary
In the real world; perfect price discrimination is not possible: So firms, divide customers into groups based on some observable trait that is likely related to. Between monopoly and competition two extremes: perfect competition: many firms, identical products, monopoly: one firm, one product. The equilibrium in a monopolistically competitive market differs from that in a perfectly competitive market in two related ways: each firm in a monopolistically competitive market has excess capacity. That is, it operates on the downward sloping portion of the average total cost curve: each firm charges a price above marginal cost. Monopolistic competition does not have all the desirable properties of perfect competition. There is the standard dead weight loss of monopoly caused by the markup of price over marginal cost. In addition, the number of firms ( and thus the variety of products) can be too large or too small.