Transcript Monopolistic Competition closer to reality

Look for:
1. Determination of the profit
maximizing price and quantity.
2. Implications for efficiency
Monopolistic Competition
closer to reality
Please listen to the audio as you work through the slides.
Monopolistic Competition
Learning Objectives
Students should be able to thoroughly and completely
explain:
1. The characteristics of monopolistic competition.
2. The characteristics of product differentiation in the
monopolistic competition case.
3. The conditions under which the monopolistically
competitive firm in the short run will:
1. Achieve economic profit
2. Minimize economic loss
Four Market Models
Monopolistic Competition: Characteristics
1. Relatively Large Number of Sellers – competitive aspect - 25 to 70,
Each with relatively Small market shares
2. Not price makers
3. No collusion – secret agreement between two or more parties for a fraudulent,
illegal, or deceitful purpose
4. Easy Entry and Exit – relative to monopoly and oligopoly,
typically smaller firms
5. Economies of scale are fewer, capital requirements lower
Pure
Competition
Monopolistic
Competition
Oligopoly
Pure
Monopoly
Market Structure Continuum
Four Market Models
Monopolistic Competition: Characteristics
6. (Non-price competition) Advertising and product differentiation
Goal – make price less of a factor in consumer decision and make the
differentiation more important
7. Independent action – they make their own independent decisions
8. Differentiated Products, substitutes are available
9. Monopolistically competitive industries more competitive than monopolistic
Pure
Competition
Monopolistic
Competition
Oligopoly
Pure
Monopoly
Market Structure Continuum
Product Differentiation
• Production of products with slightly different
physical characteristics, attributes
• Different degrees of customer service,
• Different numbers of locations for convenience,
• Different qualities, - good, better, best
Characteristics of Differentiated Products
• Product Attributes – physical or qualitatitive things
about the product
• Many different configurations of the product
• Computers
• Smart phones
• Cars
• Service – grades or levels of service
• Many different service levels to pick from
• Computers
• Smart phones
Characteristics of Differentiated Products
• Location – store or service locations
• Convenience stores vs. supermarkets
• Starbucks
• Wal-Mart Neighborhood store vs. Supercenters
vs. Sams Club
• Hotels and motels – high end vs low end
• Brand Names,
• Bayer, Anacin, Bufferin – are all aspirin
Characteristics of Differentiated Products
Packaging
It’s vodka
Characteristics of Differentiated Products
Trademarks
Characteristics of Differentiated Products
• Celebrity associated:
• Jeans,
• Perfume,
• Clothing
• Etc.
•
Some Control Over Price – due to differentiation
Issue of consumer preference – willing to pay a higher
price. Still quite limited due to potential substitutes
Examples of monopolistically competitive industries
Grocery stores
Gas stations, barber shops
Dry cleaners
Clothing stores
Restaurants
Medical care providers
Legal services
Real estate sales
Price & output determination in monopolistic competition
Assumptions:
1. Each firm produces a specific differentiated product
2. Engages in advertising
The monopolistically competitive demand curve is not perfectly elastic
• Reasons:
1. Fewer rivals than perfectly competitive structure
2. Products are differentiated, so they are not perfect
substitutes relative to pure competition.
3. The price elasticity of demand faced by the monopolistic
competitor depends on the number of rivals and the degree
of product differentiation.
4. The more rivals and less differentiation case means closer to
the Perfect Competition model than the monopoly model.
Price & output determination
in monopolistic competition
Expect New Competitors MC
Price and Costs
ATC
P1
A1
Short-Run
Economic
Profits
D
MR
Q1
Quantity
Price & output determination
in monopolistic competition
Expect New Competitors MC
Price and Costs
ATC
New competition drives down the
P
price
level – leading to economic
A
losses in the short run.
1
1
Short-Run
Economic
Profits
D
MR
Q1
Quantity
Price & output determination
in monopolistic competition
MC
Price and Costs
ATC
A2
P2
Short-Run
Economic
Losses
D
MR
Q2
Quantity
Price & output determination
in monopolistic competition
MC
ATC
A2
P2
Price and Costs
With economic losses, firms will
exit the market – stability occurs
Short-Run
when
economic profits are zero.
Economic
Losses
D
MR
Q2
Quantity
Price and Costs
Price & output determination
in monopolistic competition
Long-Run Equilibrium MC
Normal
Profit
Only
ATC
P3
= A3
D
MR
Q3
Quantity
Monopolistic Competition and Efficiency
Pure competition: P = MC = Minimum ATC
Not Productively Efficient in the long run
P > Minimum ATC
• Not Allocatively Efficient in the long run
Price > MC
under allocation of resources to the product
• Excess Capacity – plant and equipment that are under
utilized because firms are producing less than the minimum ATC
level of output.
Monopolistic Competition and Efficiency
Price and Costs
Long-Run Equilibrium MC
Price is Not
= Minimum
ATC
ATC
P3
= A3
Price  MC
D
Excess capacity
Q3
Quantity
Q4
MR
Monopolistic Competition and Efficiency
Product Variety and efficiency
Firms attempt to achieve economic profit by:
Product differentiation and advertising
Benefits of Product Variety:
1. Satisfy varied consumer tastes and expands choice
1. Autos
2. Phones
3. Clothes, shoes
2.
Tradeoff between consumer choice and productive efficiency.
1. Stronger product differentiation – greater excess capacity - greater
productive inefficiency
Monopolistic Competition and Efficiency
Product Variety and efficiency
Firms attempt to achieve economic profit by:
Product differentiation and advertising
Non - Benefits of Product Variety:
1. Nonprice Competition – adds complexity to the
monopolistically competitive firm.
• How do you measure advertising effectiveness?
2. Trial & Error Search for Maximum Profits
• Monopolistically competitive firm juggles
• price,
• product, and
• advertising to maximize profits.
Questions
• For the Monopolistic Competition Market
Structure
1. List and explain the characteristics of monopolistic
competition.
2. List and explain the characteristics of product
differentiation.
3. Explain the conditions under which the
monopolistically competitive firm in the short run
will:
1. Achieve economic profit
2. Minimize economic loss
monopolistic competition
product differentiation
nonprice competition
excess capacity
oligopoly
homogeneous oligopoly
differentiated oligopoly
strategic behavior
mutual interdependence
concentration ratio
interindustry competition
import competition
Herfindahl index
game-theory model
collusion
kinked-demand curve
price war
cartel
tacit understandings
price leadership