What you’ll learn to do: explain the characteristics of monopolistic competition and how it differs from other market structures

Monopolistically competitive industries are those that contain more than a few firms, each of which offers a similar but not identical product. Take fast food, for example. The fast food market is quite competitive, and yet each firm has a monopoly in its own product. Some customers have a preference for McDonald’s over Burger King. Some have a preference for Dominoes over Pizza Hut. These preferences give monopolistically competitive firms market power, which they can exploit to earn positive economic profits.

Consider the following questions:

• Why do gas stations charge different prices for a gallon of gasoline?
• What determines how far apart the prices of Colgate and Crest toothpaste can be?
• Why did fast food restaurants start offering salads?
• Why are fast food chicken sandwich prices different from burger prices?
• Why did McDonalds come up with the Big Mac sandwich?