Transcript Monopolistic Competition

Monopolistic
Competition
Characteristics:
Relatively Large Numbers
 Firms have a small market share
 No collusion (concerted action by firms
to restrict output and price)
 Firms act independently
 Product Differentiation

Economic rivalry takes the form of non-price
competition:
 product quality
 services and conditions surrounding the sale
 location (e.g. small grocery stores have higher
prices and less products, but have more
convenience than larger grocery stores)
 advertising and packaging
 Easy entry and exit, but more difficult than in pure
competition
Price and Output Determination
The firm's demand curve is highly, but
not perfectly, elastic .
 Why?
 There are fewer rivals than in pure
competition
 Products are close, but not perfect
substitutes
 NOTE: The more producers, the less
product differentiation and the more
elastic the demand curve is .
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In the short run, monopolistically
competitive firms will maximize profits
or minimizes losses by producing at the
point where MC = MR
Short Run Profits
In the long run, monopolistically competitive
firms will earn only a normal profit, or, in
other words, break even.

If there are short run profits
 More
firms will enter the industry
 The demand will fall because each firm has
a smaller share of the total demand and
because there are more close substitutes
available
 Demand curve becomes more elastic
because there are more substitutes

When demand curve is tangent to ATC
curve, the firm is breaking even

If there are short run losses:
 Firms
leave the industry
 Faced with fewer substitutes, there is
expanded demand
 Losses go down, and give way to normal
profit

Does this all sound familiar? It should!
Long Run Equilibrium

Monopolistic Competition and Economic Inefficiency
Price
Quantity
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Monopolistically competitive firms produce at p,
but the most efficient place to produce is at a.
Therefore,
In monopolistic competition, excess capacity
occurs and neither allocative nor productive
efficiency is realized
Excess capacity -firms produce short of the
most efficient output
Monopolistically competitive markets also have
slightly higher prices than perfectly competitive
markets as well
Nonprice Competition in a Monopolistically
Competitive Market
Product Differentiation - consumers are
offered a wide variety of products
 Product Development

Economics of Advertising

Traditional View of Advertising:
 Advertising
is redundant and economically
wasteful expenditure. It is an inefficient use of
scarce resources and causes higher costs
and prices.
 Advertising is misleading and manipulates
consumers
 Successful advertising leads to monopolies.

Effects on Demand Curve (of advertising)
 -shifts
it to the right
 -becomes more inelastic
 -this indicates a lessening of competition
(charge higher prices with a less loss of sales)
New Perspective
Advertising is an efficient means for
both providing information to
consumers and enhancing competition
 Consumers need information about
products to make rational decisions.
 Advertising is a low cost means of
providing information
 Advertising enhances competition

Effects on Demand Curve
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-shift
it to the left
-becomes more elastic
-reflects enhanced competition