Product differentiation gives firms producing a particular product some degree of price-setting or monopoly power. This differentiation may occur by virtue of advertising, convenience of location, product quality, reputation of the seller, or other factors. This model differs from the model of perfect competition in one key respect: it assumes that the goods and services produced by firms are differentiated. The model of monopolistic competition assumes a large number of firms. The first model of an imperfectly competitive industry that we shall investigate has conditions quite similar to those of perfect competition. Explain what it means to say that a firm operating under monopolistic competition has excess capacity in the long run and discuss the implications of this conclusion.
Explain and illustrate both short-run equilibrium and long-run equilibrium for a monopolistically competitive firm.Explain the main characteristics of a monopolistically competitive industry, describing both its similarities and differences from the models of perfect competition and monopoly.
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