Price Determination in the Long Run in Monopoly

The kinked demand curve revisited [An article from: Economics Letters]If industry seems to be profitable new firms would be attracted to enter it. But in lieu of product differentiation they have to incur costs on R&D, advertising, promotion, etc. to penetrate the market. Because of the entry of new competitors, the supply would increase and the market share of firms already existing would decline. This would shift the demand curve and abnormal profits would be reduced.

Due to the existence of profits, there would be continuous entry of new firms till they bring the demand curve to a position where the excess profits do not exist. As the profits touch normal level, the entry would stop. The equilibrium would be stable and the firm tends to lose if it either raises or lowers its price. Besides the competition based on price, monopolistic competition can also be characterised by non price competition where the strategy of the firm would be product differentiation, heavy advertising, quality, services, design guarantees, etc.

A monopolistic firm can use other distinct kinds of strategy to stay different from other firms in the industry.