I. Monopolistic Competition A. Characteristics 1. Firms make zero economic profits 3.
Firms face downward sloping residual demand curves due to differentiated products.
Downward sloping residual demand curve means firm has market power. B. Two types of models 1. Spatial or location models - each customer prefers products that have certain characteristics or are sold by firms located near them and is willing to pay a premium for those preferred products. Product Differentiation A. Key Concepts 1. Pricing of one brand exerts a greater constraint on another brand's pricing when the two brands are close substitutes than when they are not.