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13 March, 10:52

Compare monopolistically competitive industries with perfectly competitive industries in the long run. Which industry structure is more efficient? Compared to perfect competition, monopolistically competitive industries are

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  1. 13 March, 14:02
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    Perfect Market structure is more efficient.

    Explanation:

    Perfectly competitive markets have many different industries and they all usually produce homogeneous products. Firms operating in this market structure have very little control over pricing and they have to accept the market equilibrium as all of these firms only hold a small market share. This also holds true in the long run. There is no economic profits to be earned here in the long run as

    Price = Marginal Cost = Marginal Revenue = Average Revenue

    On the other hand, in a monopolistically competitive market firms have control over pricing as the products are differentiated. In the short run there are massive economic profits to be gained as

    Price > Marginal Costs

    In the long run, however, this economic profit attracts more and more firms and usually the attractive aspects of these markets wither off. The Price is more closer to the equilibrium such as that of the perfectly competitive industries.

    It should be noted that even in the long run, this market structure is inefficient as firms still have some control over pricing decisions and although there aren't super profits to the extent as they were in the short run; the market still does not equal the price equilibrium of perfect markets.

    Companies that can differentiate their products better still earn more than what would be possible in the perfect markets.
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