Monopolistic Competition

Monopolistic competition is a market structure with many firms selling products that are similar but differentiated.

Conditions

There are many firms competing for customers.

New firms can enter relatively easily.

Product differentiation gives firms some control over their prices.

Products differ in characteristics such as quality, design, taste, service, or brand image.

Firms attract customers without simply lowering their prices.

Four common methods are:

Characteristics of goods
Size, colour, shape, texture, or taste.
Location
A convenient location can attract customers.
Service level
Better service can allow a firm to charge a higher price.
Advertising and image
Advertising creates differences between competing products.

A firm maximizes profit at the output where $MR = MC$ . The price is read from the demand curve at that output.

For a linear inverse demand curve $P = a - bQ$ :

TR = aQ - bQ^2

MR = a - 2bQ

In the long run, entry shifts each firm’s demand curve left until economic profit is zero.

Demand is $Q = 100 - 2P$ and $MC = 10$ . Find the profit-maximizing price and quantity.

Solution Reveal Hide

Inverse demand:

P = 50 - 0.5Q

TR = 50Q - 0.5Q^2, \quad MR = 50 - Q

Set $MR = MC$ .

50 - Q = 10

So $Q = 40$ and $P = 50 - 0.5(40) = 30$ .

If $MC = AC$ , the profit is

(30 - 10) \times 40 = 800

The profit-maximizing price is Rs. 30 and the quantity is 40.

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October 16, 2026 2 min read

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