Monopolistic competition has which drawback compared to a monopoly? A. consumers have fewer options for buying new products B. governments are most likely to regulate them. C. companies have less capital for expensive investments. D. prices are most likely to be fixed at high levels
The correct answer and explanation is:
The correct answer is: C. companies have less capital for expensive investments.
Monopolistic competition, unlike a monopoly, is a market structure in which many firms offer products that are similar but differentiated. This differentiation can be in the form of branding, quality, or features, allowing firms some degree of market power. However, the competition still remains high because there are many firms, and the barriers to entry are relatively low.
One significant drawback compared to a monopoly is that firms in monopolistic competition have less capital available for large investments. This happens because the competition among firms keeps profits lower. Since there are many sellers offering similar products, companies cannot charge significantly higher prices and, as a result, may struggle to earn the profits necessary to fund large investments in research and development or infrastructure.
In contrast, monopolies—where one firm controls the entire market—often have the ability to earn substantial profits, which can be reinvested into the company. This allows monopolistic firms to make large investments in infrastructure, innovation, or expansion. Additionally, monopolies face fewer competitive pressures, so they can afford to charge higher prices, further boosting their capital reserves.
In monopolistic competition, while firms can differentiate their products to some extent, the level of competition keeps prices lower. The reduced ability to earn high profits can restrict the resources available for companies to invest in long-term, expensive projects. Therefore, firms in monopolistic competition may struggle to invest as much in innovation or capital improvement as monopoly firms do.