Monopolistic Competition
The realistic middle ground: few sellers, differentiated products, and strategic pricing.
The Monopolistic Competition model, in writing
Definition
Competition among the few or the slightly-different: each firm faces a downward-sloping demand for its own variety, prices above marginal cost, but free entry erodes profit to zero in the long run.
MR = MC with P > MC ; long run: demand tangent to ATC, profit = 0
The intuition
Cafes, brands, and apps all sell close-but-not-identical products, so each has a little pricing power but not much. Entry keeps shaving away demand until price just covers average cost: firms end up with excess capacity and P above MC, the price of variety. Society trades a bit of efficiency for having choices.
Exam tip
The long-run diagram must show demand TANGENT to ATC at the chosen output, left of minimum ATC. That tangency (zero profit with market power) is the whole model in one picture.
Related models in Micro Foundations