Chapter 16

Chapter 16 is about monopolistic competitive markets. They are markets that contain elements of competitive markets and some elements of monopolies. A monopolistic competitive market is defined by having many sellers, product differentiation, and free entry. Similar to monopolies, monopolistic competitive markets produce at the quantity where marginal revenue equals marginal costs. It then uses the demand curve to set the price at that quantity. In the long run equilibrium of a monopolistic competitive market, price equals average total cost, like a competitive market. Also, price exceeds marginal cost, as in a monopoly. There are positive and negative externalities from the entry of new firms. The product-variety externality is where an entry of a new firm creates a positive externality on consumers because consumers get some consumer surplus. The business-stealing externality is where the entry of a new firm creates a negative externality on existing firms because a new competitor causes other firms to lose customers and profits. The product differentiation apparent in monopolistic competitive markets leads to the use of brand names and advertising. This leads to critics and defenders of advertising. Like monopolies, monopolistic competitive markets don't produce at the welfare-maximizing level of output. Similar to monopolies, monopolistic competitive markets have price exceeds marginal costs and are not price takers. Like competitive markets, monopolistic competitive markets contain many firms in the market and can have entry in the long run. Monopolistic competitive, monopolies, and perfectly competitive markets all have the goal to maximize profits. I thought this chapter was interesting in its comparison of the different types of markets and how monopolistic competitive markets are hybrids of monopolies and perfectly competitive markets.