How To Determine Price & Output In A Monopolistic Competition

How To Determine Price & Output In A Monopolistic Competition

A competitive monopolistic environment exists when there is monopoly power available to a large amount of competitors.
In order to determine the profit-maximizing price for these companies as well as the amount of output they should produce, they must first determine their demand. The demand for the products offered within this market structure is more elastic than in others. The reason is that the company has numerous competitors that are all advertising products that are suitable goods of their own. The demand in this market is not perfectly elastic because products are differentiated so none of them are perfect substitutes for each other.
Essentially, profit is maximized in this market when the marginal revenue and the marginal cost match. As companies begin to profit, it encourages the entry of new businesses. The entry of these new businesses adds to further market saturation and the profit existing companies were able to achieve is lessened. As profit is lost, companies will begin to leave the industry and then the normal profit will reestablish itself. Long-run maintenance of that profit will exist where the average total cost matches the marginal revenue and marginal cost of product output.
Price elasticity depends heavily on the number of competitors and how differentiated the products are from each other. There larger the amount of competitors and the weaker the differentiation of products, there will be a greater amount of price elasticity. In the short run, companies facing an unfavorable demand or high costs will suffer losses. In the long run, companies will always settle in an industry that is profitable to them and leave an industry that has proven to be unprofitable. They will also only ever be able to secure a normal profit, meaning they will simply break even.
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