Transcript Monopolistic Competition - Gwendolyn Brooks College

FOUR MARKET MODELS
1
Monopolistic
Competition
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Review Questions
• 1) How do we treat colluding firms in a
oligopoly (legally, graphically)?
• 2) Why does the graph for competing
oligopolies have a Kinked Demand Curve?
• 3) What are the different ways a firm can
differentiate it’s product?
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Firms in a colluding oligopoly act as a
monopoly and share the profit
P
MC
ATC
D
MR
Q
If this firm decreases it’s price, other firms
will match it and lower their prices
Since all firms have lower prices, Qd for this firm
P will increase only a little
P1
Pe
P2
Q1
Qe Q2
D
Q
Where is Marginal Revenue?
MR has a vertical gap at the kink. The result is that
MC can move and Qe won’t change. Price is sticky.
P
MC
Pe
MR
Q
D
Q
Differentiated Products
Examples of NON-PRICE Competition
• Brand Names and Packaging
• Product Attributes
• Service
• Location
• Advertising (Two Goals)
1. Increase Demand
2. Make demand more INELASTIC
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Review Questions
• 1) How do we treat colluding firms in a
oligopoly (legally, graphically)?
• 2) Why does the graph for competing
oligopolies have a Kinked Demand Curve?
• 3) What are the different ways a firm can
differentiate a product?
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Perfect
Competition
Monopolistic
Competition
Oligopoly
Pure
Monopoly
Characteristics of Monopolistic
Competition:
• Relatively Large Number of Sellers
• Easy Entry and Exit (Low Barriers)
• Some control over price
• Differentiated Products
• A lot of non-price competition
(Advertising)
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Perfect
Competition
•
•
•
•
•
Monopolistic
Competition
Oligopoly
Pure
Monopoly
Relatively Large Number of Sellers
Easy Entry and Exit (Low Barriers)
Some control over price
Differentiated Products
A lot of non-price competition (Advertising)
• What industries/markets do you
believe are monopolistically
competitive?
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EXAMPLES
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Examples
1.
2.
3.
4.
5.
6.
7.
8.
Fast Food Restaurants
Furniture companies
Jewelry stores
Salons and Barbers
Clothing Stores
Iphone/Android Apps
Household Supplies
Toiletries and Cosmetics
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“Monopoly” + ”Competition”
Monopolistic Qualities
• Control over price of own good due
to differentiated product
• Demand greater than Marginal
Revenue
• Advertising to increase demand
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“Monopoly” + ”Competition”
Perfect Competition Qualities
• Large number of smaller firms
• Relatively easy entry and exit
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“Monopoly” + ”Competition”
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Efficiency and Profitability
• Based on the characteristics of monopoly and perfect
competition that make up monopolistic competition answer
the following questions:
• 1) Are monopolistically competitively
markets efficient?
• 2) Can monopolistically competitively
markets earn profits?
– When? In the short run? In the long run?
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Efficiency and Profitability
• Monopolistic competitive markets are
inefficient. Why?
– Cost of advertising/competition-raises price,
lowers quantity
– More quantity demanded than produced
• Monopolistic competitive markets do not
earn profits in long run. Why?
– Free entry and exit
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Differentiated Products
Examples of NON-PRICE Competition
• Brand Names and Packaging
• Product Attributes
• Service
• Location
• Advertising (Two Goals)
1. Increase Demand
2. Make demand more INELASTIC
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Drawing Monopolistic
Competition
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Monopolistic Competition is made up of
prices makers so MR is less than Demand
In the short-run, it is the same graph as a
monopoly making profit
P
MC
ATC
P1
In the long-run, new firms will Denter,
driving down the DEMAND for firms
already in the market.
MR
Q1
Q
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Firms enter so demand falls until there is no
economic profit
P
MC
ATC
P1
D
MR
Q1
Q
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Firms enter so demand falls until there is no
economic profit
Price and quantity falls and TR=TC
P
MC
ATC
PLR
D
MR
QLR
Q
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LONG-RUN EQUILIBRIUM
Quantity where MR =MC up to Price = ATC
P
MC
ATC
PLR
D
MR
QLR
Q
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Why does DEMAND shift?
When short-run profits are
made…
– New firms enter.
– New firms mean more close
substitutes and less market
shares for each existing
firm.
– Demand for each firm falls.
When short-run losses are
made…
– Firms exit.
– Result is less substitutes and more
market shares for remaining
firms.
– Demand for each firm rises.
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What happens when there is a loss?
In the short-run, the graph is the same as a
monopoly making a loss
ATC
P
MC
P1
In the long-run, firms will leave, D
driving
up the DEMAND for firms already in the
market.
MR
Q1
Q
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Firms leave so demand increases until there
is no economic profit
ATC
P
MC
P1
D
MR
Q1
Q
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Firms leave so demand increases until there
is no economic profit
Price and quantity increase and TR=TC
ATC
P
MC
PLR
D
MR
QLR
Q
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Are Monopolistically
Competitive Firms
Efficient?
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Efficiency Refresher
• 1) When is a market allocatively efficient?
• 2) When is a market productively efficient?
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LONG-RUN EQUILIBRIUM
Not Allocatively Efficient because P  MC
Not Productively Efficient because not producing
at Minimum ATC
P
MC ATC
PLR
D
MR
QLR
QSocially Optimal
Q
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LONG-RUN EQUILIBRIUM
This firm also has EXCESS CAPACITY
P
MC ATC
PLR
D
MR
QLR
QSocially Optimal
Q
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Excess Capacity
• Given current resources, the firm
can produce at the lowest costs
(minimum ATC) but they decide not
to.
• The gap between the minimum ATC
output and the profit maximizing
output.
• Ability to make more
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LONG-RUN EQUILIBRIUM
The firm can produce at a lower cost but it
holds back production to maximize profit
P
MC ATC
PLR
D
Excess
Capacity
MR
QLR
QProd Efficient
Q
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Practice Question
Assume there is a monopolistically
competitive firm in long-run equilibrium. If
this firm were to realize productive
efficiency, it would:
A) have more economic profit.
B) have a loss.
C) also achieve allocative efficiency.
D) be under producing.
E) be in long-run equilibrium.
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Advantages of
MONOPOLISTIC COMPETITION
• Large amount of different products for
consumers.
• Branding and advertising can result in
sustained profits for some firms.
Ex: Nike might continue to make above
normal profit because they are a well
known brand.
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Graphing
1. Draw the graph for a monopolistic
competitive fast food restaurant
making $400 total profit by selling 200
burgers at $4 each. Label D, MR, MC,
Price, and Quantity.
2. Show shifts that will occur in the longrun and identify TR, TC, and profit.
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“Monopoly” + ”Competition”
Monopolistic Qualities
• Control over price of own good due
to differentiated product
• D greater than MR
• Plenty of Advertising
• Not efficient- increased costs means
increased price and lower quantity
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“Monopoly” + ”Competition”
Perfect Competition Qualities
• Large number of smaller firms
• Relatively easy entry and exit
• Zero Economic Profit in Long-Run
since firms can enter/exit if incentive
exists
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