- In
monopolistic competition, there are many firms, and the concentration
ratio tends to be low (20-40 percent).
- The
firms sell a product which is highly similar, but extensively differentiated.
To that end, monopolistically competitive firms devote significant
resources to advertising.
-
Furthermore, low entry barriers permit new firms to enter the industry
whenever economic profits exist. Such entry eliminates long run economic
profits. Because resources used in non-price competition (advertising,
packaging, services, location, etc.) are substantial, this industry
structure results in resource misallocation and inefficiency (above-minimum
average costs.)
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