The efficiency of monopolistic competition

Question

Quizplus · Accepted Answer

The efficiency of monopolistic competition depends on whether the gain from extra product variety offsets the selling costs and the extra cost that arises from excess capacity. In other words, firms in monopolistic competition have some market power and can differentiate their products, leading to product variety that consumers may value. However, this comes at a cost of higher selling expenses and excess capacity. Therefore, the net effect on efficiency depends on whether the consumer value of product diversity outweighs the costs incurred.

The Efficiency of Monopolistic Competition