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Explain why monopolistically competitive firms frequently prefer non price to price competition?
Wiki User
∙ 11y ago
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.
Wiki User
∙ 11y ago
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