11.4 Monopolistic Competition
We now turn to monopolistic competition, which is a market structure that has the price-setting characteristics of monopoly or oligopoly and the free-entry characteristic of perfect competition. Monopolistically competitive firms have market power because they face downward-sloping demand curves, as do oligopolistic firms, but the firms earn zero long-run economic profit due to free entry, as do perfectly competitive firms.
We have seen that each oligopolistic firm may earn an economic profit because the number of firms is limited due to entry barriers. What would happen without a barrier to entry? Firms seeking profits would enter the market until the last firm to enter earns zero long-run economic profit. The resulting ...
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