Transcript Chapter 1
Monopolistic Competition Topics to be Discussed Monopolistic Competition Oligopoly Price Competition Competition Versus Collusion: The Prisoners’ Dilemma Chapter 12 Slide 2 Topics to be Discussed Implications of the Prisoners’ Dilemma for Oligopolistic Pricing Cartels Chapter 12 Slide 3 Monopolistic Competition Characteristics 1) Many firms 2) Free entry and exit 3) Differentiated product Chapter 12 Slide 4 Monopolistic Competition The amount of monopoly power depends on the degree of differentiation. Examples of this very common market structure include: Toothpaste Soap Cold remedies Chapter 12 Slide 5 Monopolistic Competition Toothpaste Chapter 12 Crest and monopoly power Procter & Gamble is the sole producer of Crest Consumers can have a preference for Crest---taste, reputation, decay preventing efficacy The greater the preference (differentiation) the higher the price. Slide 6 Monopolistic Competition Question Chapter 12 Does Procter & Gamble have much monopoly power in the market for Crest? Slide 7 Monopolistic Competition The Makings of Monopolistic Competition Two Chapter 12 important characteristics Differentiated but highly substitutable products Free entry and exit Slide 8 A Monopolistically Competitive Firm in the Short and Long Run $/Q Short Run $/Q MC Long Run MC AC AC PSR PLR DSR DLR MRSR QSR Quantity MRLR QLR Quantity A Monopolistically Competitive Firm in the Short and Long Run Observations (short-run) Downward sloping demand--differentiated product Demand is relatively elastic--good substitutes MR < P Profits are maximized when MR = MC This firm is making economic profits Chapter 12 Slide 10 A Monopolistically Competitive Firm in the Short and Long Run Observations (long-run) Profits will attract new firms to the industry (no barriers to entry) The old firm’s demand will decrease to DLR Firm’s output and price will fall Industry output will rise No economic profit (P = AC) P > MC -- some monopoly power Chapter 12 Slide 11 Comparison of Monopolistically Competitive Equilibrium and Perfectly Competitive Equilibrium Monopolistic Competition Perfect Competition $/Q $/Q MC Deadweight loss AC MC AC P PC D = MR DLR MRLR QC Quantity QMC Quantity Monopolistic Competition Monopolistic Competition and Economic Efficiency The monopoly power (differentiation) yields a higher price than perfect competition. If price was lowered to the point where MC = D, consumer surplus would increase by the yellow triangle. Chapter 12 Slide 13 Monopolistic Competition Monopolistic Competition and Economic Efficiency With no economic profits in the long run, the firm is still not producing at minimum AC and excess capacity exists. Chapter 12 Slide 14 Monopolistic Competition Questions 1) If the market became competitive, what would happen to output and price? 2) Should monopolistic competition be regulated? Chapter 12 Slide 15 Monopolistic Competition Questions 3) What is the degree of monopoly power? 4) What is the benefit of product diversity? Chapter 12 Slide 16 Monopolistic Competition in the Market for Colas and Coffee The markets for soft drinks and coffee illustrate the characteristics of monopolistic competition. Chapter 12 Slide 17 Elasticities of Demand for Brands of Colas and Coffee Brand Colas: Ground Coffee: Chapter 12 Elasticity of Demand Royal Crown Coke Hills Brothers Maxwell House Chase and Sanborn -2.4 -5.2 to -5.7 -7.1 -8.9 -5.6 Slide 18 Elasticities of Demand for Brands of Colas and Coffee Questions 1) Why is the demand for Royal Crown more price inelastic than for Coke? 2) Is there much monopoly power in these two markets? 3) Define the relationship between elasticity and monopoly power. Chapter 12 Slide 19