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Free Example of Monopolistic Competitive Market Essay

A monopolistic competitive market is a market in which there are large numbers of buyers and sellers who sell differentiated products which are not homogenous (Aggaarwal and Vijay 166). It is characterized by product differentiation in terms of size, taste or quality. There is free entry and exit of firms hence new firms enter without any barriers. It is also characterized by many sellers and buyers. In the short run the sellers enjoy super-normal profit. In the long run, the profit is normalized by the entry of new sellers (Aggaarwal and Vijay 166). This can be illustrated by graph on the next page.  In the first diagram, area X represents the supernormal profit in the short run. The second diagram shows the elimination of supernormal profit by the entry of other firms in the long run (Tuffy 129- 131).

Monopolistic Competitive Markets and Oligopoly. In the monopolistic competitive markets there are many sellers and buyers while in Oligopoly there are few large sellers. In the monopolistic competitive market there is a free entry and exit of other firms while in oligopoly there are barriers to entry. In the monopolistic competitive markets products are differentiated but in oligopoly products are differentiated or homogenous.

The demand curve in monopolistic competitive market is downward sloping while that of oligopolistic market is kinked. These two markets are similar in that the products sold are closely related and have some degree of the market power (Hoag and Hoag 207-212). The gas market is an example of the Oligopoly. The gas prices rise due to the formation of cartels – group of firms acting as one and thus raise the prices together. In acting as one, each would maintain its share of the market and the higher price increases profit to all the firms (Hoag and Hoag 213).

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