Monopolistic Competition

Monopolistic competition sits between perfect competition and monopoly. There are many competitors and entry into and exit out of the market is easy (no barriers). Products created by firms are similar but through marketing, firms are able to differentiate their products. Because perfect information doesn’t exist in this market, firms are able to earn a profit in the short run.

In the long run, the story is different. Like perfect competition, companies break even over the long run. If one company experiences profit above its competition, more companies will enter the market and drive down prices. If companies begin experiencing losses, competitors will leave the market driving losses back to break even.

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