Comparing Monopolistic Competition and Competition In the long run, competitive and monopolistically competitive firms produce where P = AC and earn zero profits. Each firm in monopolistic competition offers a slightly different product and so each firm faces a downward-sloping demand curve. As a result, firms under monopolistic competition charge prices above marginal cost, they produce a smaller quantity compared with competitive firms and Q* is not at minimum average cost. In the case of competitive firms, each firm produces exactly the same product so there are perfect substitutes for each firm’s products. As a result, the demand curve is perfectly elastic, production quantity is higher than under monopolistic competition, and output is at the point that minimizes average costs.
Note that for comparison we show the monopolistic competition output level, Q*M.Comp and the competitive output level, Q*Comp in the right panel.
Note that for comparison we show the monopolistic competition output level, Q*M.Comp and the competitive output level, Q*Comp in the right panel.