Monopolistic Competition with a Homogeneous Product

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In monopolistic competition, firms produce differentiated products. Moreover, in this Demonstration based on a numerical example found in [1], each one of the monopolistically competitive firms produces a homogeneous product with free entry and exit. The demand function is given by and the cost function is (where is fixed costs).


The Demonstration shows the profits, the dead weight losses (DWL), and the average cost pricing for each representative monopolistically competitive firm, given a number of firms in the market and the fixed costs. As you can see, when the fixed costs increase, the long-run zero-profit equilibrium is sustainable with fewer firms.


Contributed by: Christos Papahristodoulou (January 2014)
(Mälardalen University, Sweden)
Open content licensed under CC BY-NC-SA




[1] D. Carlton and J. Perloff, Modern Industrial Organization, 4th ed., Boston: Pearson/Addison–Wesley, 2005.

[2] Wikipedia. "Monopolistic Competition." (Jan 13, 2014)

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