Monopolistic competition

Core notes:

To what extent is monopolistic competition an ideal market structure for consumers?

Low barriers to entry mean that there is intense competition between firms – leading to more choice of product for consumers

Eval: Extensive choice is not always a benefit for consumers – people have bounded rationality and may not make optimal decisions if there is a bewildering choice 

In monopolistic competition, prices are kept closer to marginal cost leading to improved allocative efficiency.

Eval: Although competition keeps prices low, the saturation of products may lead to firms not exploiting economies of scale, this leads to a loss of productive efficiency

There will be a high level of innovation causing an improvement in dynamic efficiency.

Eval: Product differentiation through excessive packaging leads to increased wastage and external costs e.g. from disposing plastic.