Excess capacity and inefficiency result under monopolistic competition.

Question

Quizplus · Accepted Answer

In monopolistic competition, there are many firms operating and producing similar products but they engage in non-price competition such as branding, advertising, and product differentiation. This leads to excess capacity as firms may produce more than the optimal level to maintain a competitive edge in the market. Additionally, the high costs of non-price competition lead to inefficiencies in the market.

Excess Capacity and Inefficiency Result Under Monopolistic Competition