Transcript Monopolistic Competition

Monopolistic Competition
Monopolistic Competition is based upon a
number of assumptions
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Many buyers and many sellers
No barriers to entry or exit
Differentiated products
Perfect information
Perfect factor mobility
Features
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Firms act independently - one firm's pricing actions will only modestly affect other
firms, if at all, since they each have such a small % of the market.
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Collusion in this type of market is impossible - too many firms to assure any
agreements can be maintained.
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Profits – Due to the absence of barriers to entry firms operating under monopolistic
competition will only make normal profits in the long-run although it is possible to
make abnormal profits in the short-run.
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Demand Curve – The demand curve facing a monopolistically competitive firm is
downward sloping as in order to sell additional units of output, a monopolistically
competitive firm must lower the price of all previous units. Demand is more elastic
than the monopoly’s demand curve because the seller has many rivals producing close
substitutes however it is less elastic than in perfect competition, because the seller’s
product is differentiated from its rivals, so the firm has some control over price.
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Advertising – This is widely used to increase the demand for an individual firms
product and make it less elastic. However, it tends to be small scale and local rather
than national advertising campaigns.
• Differentiated products means there is
likely to be some degree of brand
loyalty
• Firms have some element of
interdependence when deciding price,
‘price makers’ to a certain extent
because a number of close substitutes
exist
• Firms engage in non- price competition
• Hence firms in monopolistic competition
face a downward sloping demand curve
Short- Run Abnormal Profit in
Monopolistic Competition
MC
Cost/
Price
AC
P
c
a
b
D= AR
q
MR
Output
Long-run Making Normal Profit
In the long-run new firms will enter the
market as abnormal profits were being made
and the demand facing each individual firm
will drop.
Demand will fall up until the point where AR
(D) = AC and only normal profits are being
made.
MC
Cost/
Price
c= P
AC
a
D= AR
q
MR
Output
Short-Run Losses in Monopolistic
competition
• Illustrate.
AC
MC
Cost/
Price
c
P
d
a
D= AR
q
MR
Output
Long- run equilibrium
• Due to freedom of entry and exit, if
abnormal profits exist, new firms enter
the industry, shifting the demand curve
for existing firms to the left.
• If losses exist, firms will leave the
industry, shifting the demand curve for
existing firms to the right
• Normal profits will be made in the long
run.
Productive and Allocative
Efficiency in Monopolistic
Competition
• Recall the short run position of a
Monopolistically Competitive Firm
making an abnormal profit
• What are the productive and allocative
efficient levels of output?
MC
Cost/
Price
AC
P
c
a
b
D= AR
q
MR
Output
• And for the short- run making a loss?
AC
MC
Cost/
Price
c
P
d
a
D= AR
q
MR
Output
• And for the long- run equilibrium?
MC
Cost/
Price
c= P
AC
a
D= AR
q
MR
Output
Conclusion
• Unlike PC, where in the l/r firms are
profit maximisers, productively and
allocatively efficient, in monopolistic
competition, firms, although maximising
profits are neither productively or
allocatively efficient.