CHAPTER 12 • Monopolistic Competition and Oligopoly 453 There are many other examples of monopolistic competition besides toothpaste Soap, shampoo, deodorants, shaving cream, cold remedies, and many other items found in a drugstore are sold in monopolistically competitive markets The markets for many sporting goods are likewise monopolistically competitive So is most retail trade, because goods are sold in many different stores that compete with one another by differentiating their services according to location, availability and expertise of salespeople, credit terms, etc Entry is relatively easy, so if profits are high in a neighborhood because there are only a few stores, new stores will enter Equilibrium in the Short Run and the Long Run As with monopoly, in monopolistic competition firms face downward-sloping demand curves Therefore, they have some monopoly power But this does not mean that monopolistically competitive firms are likely to earn large profits Monopolistic competition is also similar to perfect competition: Because there is free entry, the potential to earn profits will attract new firms with competing brands, driving economic profits down to zero To make this clear, let’s examine the equilibrium price and output level for a monopolistically competitive firm in the short and long run Figure 12.1(a) shows the short-run equilibrium Because the firm’s product differs from its competitors’, its demand curve DSR is downward sloping (This is the firm’s demand curve, not the market demand curve, which is more steeply sloped.) The profitmaximizing quantity QSR is found at the intersection of the marginal revenue $/Q $/Q MC MC AC AC PSR PLR DSR DLR MRSR MRLR QSR (a) Quantity Quantity QLR (b) F IGURE 12.1 A MONOPOLISTICALLY COMPETITIVE FIRM IN THE SHORT AND LONG RUN Because the firm is the only producer of its brand, it faces a downward-sloping demand curve Price exceeds marginal cost and the firm has monopoly power In the short run, described in part (a), price also exceeds average cost, and the firm earns profits shown by the yellow-shaded rectangle In the long run, these profits attract new firms with competing brands The firm’s market share falls, and its demand curve shifts downward In long-run equilibrium, described in part (b), price equals average cost, so the firm earns zero profit even though it has monopoly power