Journaling of Chapter 17: Monopolistic Competition

Chapter 17 focused on monopolistic competition, a market structure in which many firms sell products that are similar but not identical. In order to be considered monopolistic competition, there must be many sellers, product differentiation, and free entry. Monopolistic competition shares some features of perfect competition and shares some features of monopolies. Like perfect competition, entry and exit will drive profits to zero economic profit in the long run. Like monopoly, monopolistic competition firms have a downward sloping demand curve. Monopolistically competitive firms produce an excess capacity because they produce below the efficient scale. They also charge prices that exceed their marginal cost for their products which is the markup over marginal cost. Monopolistic competition may be inefficient because it has a standard deadweight loss and because the number of firms is not ideal. The entry of new firms causes the product-variety externality and the business stealing externality. There is no easy way for public policy to solve these inefficiencies. Each firm has the incentive to advertise. Evidence suggests that advertising increases competition which reduces prices for consumers. Advertising correlates to the quality of the product. Brand names provide information and give firms an incentive to maintain their quality.

I would give this chapter a difficulty rating of 1 out of 3. The readers have already been introduced to perfect competition as well as monopoly so it was easier to grasp the concepts of monopolistically competition because it was basically different features that were picked from the two other extremes.