Share This Article
A monopolistically competitive firm is in long-run equilibrium when quantity supplied equals the quantity demanded. This means that there are no changes to the price or output of the firm, which will result in profit for the company. The level of competition within a monopolistically competitive market determines what happens to prices and profits over time.
When competition is relatively low, the firm will have a more difficult time making and keeping profit. This means that they are much less likely to stay in business for long periods of time. When there are many competitors within an industry, firms can move to one extreme or another as necessary to maximize profits at any given point in time without worrying about losing all their customers (because other firms do the same thing). This reduces risk over the life cycle of a company because changes between two extremes happen gradually instead of quickly like with monopolies. The number and size distribution of firms also plays a role in how switching costs affect them: if there are only small numbers of large players, then these companies experience higher average fixed costs meaning that they need larger numbers of customers to break even.
This is because the fixed costs make it more difficult for these companies to achieve equilibrium at any given point in time. Large firms also have higher average cost curves, meaning they need fewer customers as a percentage than smaller firms do to attain profitability and therefore larger numbers of potential competitors are needed for them to be able to find long-term equilibrium. That being said, monopolistically competitive markets can be unstable when there are few large players (or only one). This happens when other players enter into this market and face no switching costs: if these new entrants offer a lower price or better quality goods then all existing incumbents will see their profits fall significantly until eventually none remain [recall that an incumbent has already incurred the fixed cost of entering the market and therefore is not as price sensitive].
The rules for monopolistic competition are complex. The most important rule to remember is that a profit-maximizing firm will charge a higher marginal revenue than it would in perfect competition because, if the incumbent’s demand curve shifts outwards by an amount greater than its elasticity (the industry’s aggregate supply), then all other firms will have to raise their prices in order to maintain equilibrium. That means no lower quantity demanded can be sold at this new set of prices: just imagine having two car manufacturers competing on pricing but both use production techniques which restrict how much they can produce per day; one could sell more cars by lowering its price while the other has even less cars to sell at the higher price.
This has important implications for firms looking to enter a monopolistically competitive industry: because demand is less elastic, it will need an even lower marginal cost (or difference in costs) than would be needed in perfect competition or if they were entering a perfectly competitive market. This means that entry barriers are likely much higher and any firm trying to compete must have access to some sort of technology which isn’t accessible by others otherwise its profits may too low for survival on their own.
When considering long-run equilibrium we also want to think about how changes in individual firms’ decision can affect supply and/or change the level of output demanded per consumer–in other words, what happens when one competitor leaves the market?
If one of these firms leaves, then it’s demand will drop but supply is likely to stay constant. This means that we would see an increase in price and reduction in output demanded per consumer–this is because there are now more consumers for each firm available so if all firms produce at their same marginal cost, they’ll have higher profits which can be used to drive down prices or up production capacity. Long-run equilibrium also predicts a decrease in profit margins as well. This could happen whether they exit voluntarily or if they’re forced out through bankruptcy due to not being able to keep up with competition from other monopolistically competitive producers. In either case, this leads them towards lower levels of profitability which may make staying on profitable for more time or selling off their assets to stay afloat impossible.
To summarize, in the long-run equilibrium of monopolistically competitive firms two things happen: they produce at a constant cost and decrease profit margins as well–both leading them towards lower levels of profitability which may make staying profitable for longer and/or selling off their assets necessary. This is because there are now more consumers per firm available so if all firms produce at the same marginal cost, then they’ll have higher profits with which they can drive down prices or up production capacity while maintaining their current price level through lowering average costs. The other thing that happens when a monopoly competes against rivals who offer similar goods is that it will act aggressively to discourage entry by setting low prices (as possible) in order to drive out rivals.
There are two things that happen when a monopolistically competitive firm is in long-run equilibrium: it produces at a constant cost and decreases profit margins as well–both leading it towards lower levels of profitability which may make staying profitable for longer and/or selling off its assets necessary. This is because there are now more consumers per firm available so if all firms produce at the same marginal cost, then they’ll have higher profits with which they can drive down prices or up production capacity while maintaining their current price level through lowering average costs. The other thing that happens when a monopoly competes against rivals who offer similar goods is that it will act aggressively to discourage entry by setting low prices (as possible) and by engaging in diversionary advertising (advertising other products which are not the same as the good it sells).
In this scenario, monopolistic competition can be thought of as a race to an equilibrium point where firms have comparable cost structures. This is because those that make the investment necessary for economies of scale will find themselves at a competitive disadvantage against their smaller rivals who do not need to invest so much capital up front. In these cases, there may eventually come about one firm or two or maybe three that achieve dominance through size-based advantages over others–whether they’re big enough to sustain more losses than their competitors without going bankrupt while still maintaining market share; whether they’re small but keep on reinvesting all profits into production capacity with little consideration for the risk of bankruptcy. The result is a monopoly or oligopoly situation with few firms in competition, each enjoying some market power and being able to charge higher prices than if there was more competition in the industry. Examples include Walmart in retailing, Microsoft Office Suite Software (Microsoft Word) on PCs, Google Search Engine on web browsers such as Chrome and Safari. Monopolistic Competition Long-run Equilibrium: when a monopolistically competitive firm is in long-run equilibrium, it will adopt strategies that are similar to those used by perfect competitors–such as not making large investments into production capacity; relying mostly on price cuts rather than advertising campaigns for attracting new entrants; limiting its output because it cannot afford to make too many