CFA book2 - Self test questions Question says: 1. firms produce differentiated products.2 Significant barriers to entry/exit. 3. Largely independent demand. Why is it considered monopolistic competion? If there are significant barriers, in the long run, firms will earn economic profit. Doesn’t that violate assumption abt monopolistic competion? Any suggestions pls…
been awhile (already!), but if my memory serves me right … “product differentiation” is a feature of monopolistic competition. you sound Indian, where are you from ?
remember monopolistic competition is completely different from competition with monopolies…it may help to tie actual products to the terms. monopolistic competition= detergent or spaghetti sauce… many groceries. you need to find a way to differentiate your spag sauce from competitors sauce so you market differently. oligopoly- auto industry. dependant on each other since few providers perfect competition= farmers market.
Sumit, I think you may have read the question wrong… there are FEW significant barriers to entry/exit… which fits the description of monopolistic competition… and I believe there is no economic profit in the long run.
There will be no ecnomic profit in the long run as more companies will enter the market and lead the market to COmpetion. Read the text it say, Monpolistic competition has diffrentiated product with significant (some) barriers.
Thanks all for replying… CFA book says firms are free to enter or exit… schweser says there are low barriers.
sumit_kansal Wrote: ------------------------------------------------------- > Thanks all for replying… > > CFA book says firms are free to enter or exit… > schweser says there are low barriers. thats the same thing? isn’t it :-?
Largely independent demand. The demand of oligopoly is dependand on the other thats why they can collude i.e. game theory prisoners dilemma. Where demad is independent there can not be collusion so this can not be an oligopoly its rather monopolistic competition.
I guess they are considering Independence to be more important. Thanks all.