Answer to Question #99569 in Microeconomics for Salman Ali

Question

What factors ensure that the magnitude of economic rents earned by firms in a perfectly competitive markets are different from the magnitude earned by firms in a differentiated goods market?

Answer 1

Differentiated goods markets have higher entrance barriers, caused by specific qualities of goods, so the quantity of producers doesn't increase fast. So the prices don't decline till the level of marginal cost, as it happens on the perfectly competitive markets. The rent on differentiated goods markets are higher than on perfectly competitive one.