Defining Monopolistic Competition

Size	Small Company: Peter’s Drive-in	Medium Company: Crave Cupcakes	Large Company: Tim Horton’s
Features
Differentiated Products?	Y	Y	Y
Control Over Price?	Y	Y	Y, but at the corporate level, not at the franchisee’s behest
Mass Advertising?	N	N	Y
Brand Name Goods?	N, burgers are WYSIWYG	Y	Y
Franchises Available?	N	N	Y
Multiple Retail Outlets?	N, just one really good one on Transcanada highway	Y	Y, but corporate limits number of stores in geographic locations so as not to poach own customers
International Presence?	N	N	Y, including at the Dublin Zoo and a US base in Kandahar
Bulk Buying (Economies of Scale)?	Some	Some	Definitely

Definition:  Monopolistic competition is a market structure where firms compete for things other than price, they compete for customers. In a monopolistically competitive market you will find many firms that acts independently of each other because each one wants a share of the total market demand in their industry. They each sell a product that is similar by definition but the goal is to persuade customers that it is different than the product offered by it’s competitors. For example, people like to eat hamburgers (imagine a fairly inelastic total market demand curve), so the firms have come up with products such as The Whopper, The Big Mac, The Baconator, and The Fatburger (each firm has a fairly elastic demand for their individual product). Technically, they’re all burgers, but each one is a differentiated product. Product Differentiation is a achieved through things like the logo, brandname, or packaging. It is also achieved by operating in a superior location and offering superior service to customers to keep them coming back. They must also occasionally improve or redevelop their product to stay competitive, and also engage in advertising to make their product’s presence known. These things will make the product seem unique to the consumer.

When a monopolistically competitive firm makes economic profits, it will attract new firms to take a slice of that pie.  Monopolistically competitive firms offer ease of entry (with the exception of industries that require a government issued license such as taxi driving because licenses are limited in quantity). Firms also have some control over the prices they charge to their customers.

A monopolistically competitive firm should operate at the output where MR=MC, and use the demand curve as the point where they set their price. This will achieve maximum total profits, but unfortunately not allow the firms to achieve economic (min AC) or allocative (price = MC) levels of efficiency. Operating at excess capacity is the price of offering a unique product and competing in a monopolistically competitive market.