AP Microeconomics / Imperfect Competition
Lesson
Many sellers, a few sellers, and strategy
Monopolistic competition and oligopoly sit between monopoly and perfect competition.
Learning goals
- Describe product differentiation and long-run profit in monopolistic competition.
- Read a simple payoff matrix for a dominant strategy.
Explanation
Monopolistic competition has many firms and easy entry, but products are differentiated. Each firm faces a downward-sloping demand curve. Entry still eats economic profit in the long run, so a typical picture has price on ATC but above MC—zero extra profit with leftover inefficiency.
Oligopoly is a few firms watching one another. A payoff matrix shows what each earns if both cut price, both keep price, or one undercuts. A dominant strategy is best no matter what the other does. Mutual undercutting can leave both worse than if they had held the line, which is why collusion is tempting and often unstable.
Key terms
- Monopolistic competition. A market with many firms, free entry, and differentiated products.
- Dominant strategy. A choice that yields a better payoff regardless of the other player’s choice.
Common mistakes
- Treating monopolistic competition as monopoly because demand slopes down.
- Circling a payoff without checking both players’ incentives.
Practice
Original Marlow Works items. Check the answer explanation after you try.
A binding price ceiling is set below equilibrium in the market for rental apartments. What is the most likely result?
Original Marlow Works item — not a College Board question.
Take your time—this is practice, not a test.
Answer explanation
In long-run monopolistic competition, why can price still exceed marginal cost?
Answer. Each firm keeps some market power from differentiation, even after entry drives economic profit to zero.
P = ATC can hold at a point where P is still above MC.
Related resources
External links with reuse status. Marlow Works is independent and does not copy restricted exam or textbook material.
Official / link only
AP Microeconomics course page
Official six-unit framework for markets, costs, and market failure.
College Board · All rights reserved · accessed 2026-10-01
Open sourceCC BY — attribution required
Principles of Microeconomics: Scarcity and Social Provisioning
Open microeconomics background for scarcity, markets, and elasticity.
Open Textbook Library listing · CC BY · accessed 2026-10-01
Open source