Transcript Ch. 17 Notes

Monopolistic Competition
Ch. 17
Characteristics
• Many firms selling similar (not identical)
products
• Not price taker, face downward demand curve
• Free entry & exit of firms
– long run economic profit
will be zero
Compare to Perfect Comp.
• Similar in that there are many sellers, but
instead of identical products, they can
differentiate their products
Short Run
• Follows monopolist’s rule for profit max:
MR = MC then use Demand curve to find price
• Can have a profit or loss based on ATC curve
Long Run
• Firms will enter (if profit) or exit (if loss) until
economic profit is zero
• ATC curve will touch Demand curve (tangent)
at same quantity as MR = MC
• P > MC and P = ATC
in long run
Major differences PC vs. MC
1. Excess Capacity: Profit Max output is less
than quantity that minimizes ATC
- Firms could increase quantity produced and
still lower ATC, but it won’t because it would
have to cut its price and would lose profit
Major differences PC vs. MC
2. Markup: In PC, P = MC but in Mon. Comp.,
P > MC and this means in Mon. Comp., a firm
always wants to see one more customer
Welfare of Society
• Has normal deadweight loss of a monopoly
caused by “markup”
• Regulation is almost impossible
• Entry of firms produces 2 externalities:
positive (product variety) and negative
(business stealing)
Advertising
• When do we see ads? Differentiated
consumer goods
• Criticism: ads are manipulative and they
impede competition which makes buyers less
concerned with price allowing more markup
• Defense: ads provide info, allows customers to
make better choices & it fosters competition
Advertising as a Signal of Quality
• Content is not as important as showing that
your firm is willing to spend $ on ads, which is
a signal of quality
• Cheap advertising doesn’t work
Brand Names
• Cause consumers to perceive differences that
often do not exist
• Consumers usually act irrationally by paying
more for brand name when quality is same for
a generic brand
• Defense of brand names: It is way to indicate
quality to consumers and give an incentive to
maintain quality (reputation)