Transcript Micro Ch 23 presentation 1- Monopolistic Competition

Micro Chapter 23 Presentation
1
Monopolistic Competition
Characteristics of Monopolistic
Competition
• 1. Relatively large number of sellers- 25,
50 not hundreds or thousands
• 2. Differentiated Products-often by heavy
advertising
• 3. Easy Entry/Exit from the industry
Characteristics Continued
• 4. Small market share
• 5. No collusion (situation where firms act
together in order to fix prices, divide a
market, or otherwise restrict competition)
• 6. Independent Actions- each firm can
determine its own pricing policy
Examples of Monopolistic
Competition
• In metropolitan areas: Grocery Stores, gas
stations, barbershops, dry cleaners,
clothing stores, medical care, and real
estate agencies
Product Differentiation
• One firm’s product is distinguished from
competing products by means of design,
related services, quality, location or other
attributes
Product Differentiation Examples
• 1. Product Attributes- differences in
functional features, materials, design and
workmanship
• Ex- PCs with different memory, speed etc.
• Retail stores, furniture stores
Product Differentiation Examples
• 2. Service- helpfulness of clerks,
reputation, turnaround on delivery
Product Differentiation Examples
• 3. Location- Convenient stores v. large
grocery stores, Motels close to freeway
exits
Product Differentiation Examples
• 4. Brand Names and Packaging- Advil v.
Generics
• Bottled water exclaiming “Pure Spring
H2O”
• Use of celebrities to sell products
Product Differentiation Examples
• 5. Advertising- to make price less of a
factor in consumer purchases and make
product differences a greater factor =
Nonprice Competition
Product Differentiation Examples
• 6. Some control over prices- if consumers
prefer a certain brand, within limits, they
will purchase the preferred product
Demand Curve
• Monopolistic Competition has a highly but
not perfectly elastic demand curve
• Reasons:
• 1. Few rivals
• 2. Products are differentiated so they are
not perfect substitutes
Profit
• In the long run, only a normal profit will be
earned
• Normal profit- the payment made by a firm
to obtain entrepreneurial ability (cost of
doing business)
When Profits Occur
• New firms enter the industry
• Demand faced by existing curves shifts to
the left (falls) because of new substitutes
and reduces economic profits
Price and Output
Determination
In Monopolistic
Competition
Short-Run Profits
Price and Costs
MC
ATC
P1
A1
Economic
Profit
D1
MR = MC
MR
0
Q1
Quantity
When Losses Occur
• With SR losses, some firms will exit
• With fewer substitutes, the existing firms
will have demand curves shift to the right
(up) and eventually they will earn normal
profits
Price and Output
Determination
In Monopolistic
Competition
Short-Run Losses
Price and Costs
MC
ATC
A2
P2
Loss
D2
MR = MC
MR
0
Q2
Quantity
Monopolistic Competition
and Efficiency
Recall: P=MC=Minimum ATC
Price and Costs
MC
ATC
P3=
A3
P4
Price is Higher
D3
MR = MC
Excess Capacity at
Minimum ATC
0
MR
Q3
Q4
Quantity
Monopolistic Competition is Not Efficient