Introduction
Monopolistic Competition and Oligopoly
Because the monopolistically competitive firm's product is differentiated from other products, the firm will face its own downward-sloping “market” demand curve. This demand curve will be considerably more elastic than the demand curve that a monopolist faces because the monopolistically competitive firm has less control over the price that it can charge for its output. The firm's control over its price will depend on the degree to which its product is differentiated from competing firms' products. If the firm's product is not differentiated from other products, the firm will face a relatively elastic demand curve and will have less control over the price it can charge. If the firm's product is differentiated compared to a competing firm's products, the firm will face a relatively inelastic demand curve and will have more control over the price that it can charge.
Price-searching behavior. The monopolistically competitive firm will be a price-searcher rather than a price-taker because it faces a downward-sloping demand curve for its product. The firm searches for the price that it will charge in the same way that a monopolist does, by comparing marginal revenue with marginal cost at each possible price along the market demand curve.
