Allocative Efficiency Under Monopolistic Competition

• The traditional view holds that Monopolistic Competition results in allocative inefficiency since a) costs are not minimized and b) output is restrained (I.e. P>LRMC and P>min.LRATC

• This view is seriously challenged since

  • product variety is stimulated by Monop. Comp.
  • “excess” capacity may not be wasteful
  • advertising is information enhancing

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