Explain why monopolistically competitive firms frequently prefer non price to price competition?

Answer 1

The monopolistically competitive firm frequently prefers nonprice competition to price

competition, because the latter can lead to the firm producing where P = ATC and thus making

no economic profit or, worse, producing in the short run where P < ATC and thus losing money,

with the possibility of eventually going out of business.

Nonprice competition, on the other hand, if successful, results in more monopoly power: The

firm's product has become more differentiated from now less-similar competitors in the industry.

This increase in monopoly power allows the firm to raise its price with less fear of losing

customers. Of course, the firm must still follow the MR = MC rule, but its success in nonprice

competition has shifted both the demand and MR curves upward to the right. This results in

simultaneously a larger output, a higher price, and more economic profits.