Chapter 67, Problem 2CYU

To determine

To state: the reasons why firms in a monopolistic competitive industry can't join together to form a monopoly.

Explanation of Solution

As in a monopolistic competitive market, there are differentiated products so, the new and different products, produced by the new firms, will lure the consumers, and because of that, many new firms will take some part of the profit from a monopoly (existing joined firms). Therefore, in the long run, it is not possible to maintain this monopoly.

In a monopolistically competitive market, there is freedom of entry in the long run, which is especially likely in case the firms are gaining economic profits in the short run. This will lure the new firms to these opportunities for profit and will prefer to enter the market in the long run. Compared to a monopolistic market, there are no barriers to entry in a monopolistically competitive market; therefore, it is very easy for new firms to enter the market in the long run.

Economics Concept Introduction

Introduction:

Monopolistic Competition is where there are differentiated goods, there are many firms and there is the freedom to enter and exit.

Monopoly is defined as a market structure where there is a single seller.