ecn 2 q
naushil14
5PMonopolisticCompetition.pptxMonopolistic Competition closer to reality Please listen to the audio as you work through the slides.
Look for:
Determination of the profit maximizing price and quantity.
Implications for efficiency
Creative Commons Attribution 4.0 License, Charles Hackner Houston Community College unless otherwise noted CC BY NC
Learning Objectives
Students should be able to thoroughly and completely explain:
The characteristics of monopolistic competition.
The characteristics of product differentiation in the monopolistic competition case.
The conditions under which the monopolistically competitive firm in the short run will:
Achieve economic profit
Minimize economic loss
Monopolistic Competition
Market Structure Continuum
Pure
Competition
Pure
Monopoly
Monopolistic
Competition
Oligopoly
Four Market Models
Monopolistic Competition: Characteristics
Relatively Large Number of Sellers – competitive aspect - 25 to 70, Each with relatively Small market shares
Not price makers
No collusion – secret agreement between two or more parties for a fraudulent, illegal, or deceitful purpose
Easy Entry and Exit – relative to monopoly and oligopoly, typically smaller firms
Economies of scale are fewer, capital requirements lower
Market Structure Continuum
Pure
Competition
Pure
Monopoly
Monopolistic
Competition
Oligopoly
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
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)
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
CC BY NC Packaging of the World
Request sent
8
Trademarks
Characteristics of Differentiated Products
CC0
9
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
Characteristics of Differentiated Products
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:
Each firm produces a specific differentiated product
Engages in advertising
The monopolistically competitive demand curve is not perfectly elastic
Reasons:
Fewer rivals than perfectly competitive structure
Products are differentiated, so they are not perfect substitutes relative to pure competition.
The price elasticity of demand faced by the monopolistic competitor depends on the number of rivals and the degree of product differentiation.
The more rivals and less differentiation case means closer to the Perfect Competition model than the monopoly model.
D
MR
P1
ATC
Price and Costs
Q1
Short-Run
Economic
Profits
Expect New Competitors
Price & output determination
in monopolistic competition
Quantity
A1
MC
D
MR
P1
ATC
Price and Costs
Q1
Expect New Competitors
Quantity
A1
New competition drives down the
price level – leading to economic
losses in the short run.
MC
Short-Run
Economic
Profits
Price & output determination
in monopolistic competition
D
MR
MC
P2
ATC
Price and Costs
Q2
Short-Run
Economic
Losses
Quantity
A2
Price & output determination
in monopolistic competition
Short-Run
Economic
Losses
D
MR
MC
P2
ATC
Price and Costs
Q2
Quantity
A2
With economic losses, firms will
exit the market – stability occurs
when economic profits are zero.
Price & output determination
in monopolistic competition
D
MR
MC
P3
= A3
ATC
Price and Costs
Q3
Quantity
Long-Run Equilibrium
Normal
Profit
Only
Price & output determination
in monopolistic competition
Monopolistic Competition and Efficiency
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.
Pure competition: P = MC = Minimum ATC
D
MR
MC
P3
= A3
ATC
Price and Costs
Q3
Quantity
Long-Run Equilibrium
Price is Not
= Minimum
ATC
Price MC
Monopolistic Competition and Efficiency
Q4
Excess capacity
Monopolistic Competition and Efficiency
Product Variety and efficiency
Firms attempt to achieve economic profit by:
Product differentiation and advertising
Benefits of Product Variety:
Satisfy varied consumer tastes and expands choice
Autos
Phones
Clothes, shoes
Tradeoff between consumer choice and productive efficiency.
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:
Nonprice Competition – adds complexity to the monopolistically competitive firm.
How do you measure advertising effectiveness?
Trial & Error Search for Maximum Profits
Monopolistically competitive firm juggles price, product, and advertising to maximize profits.
Questions
For the Monopolistic Competition Market Structure
List and explain the characteristics of monopolistic competition.
List and explain the characteristics of product differentiation.
Explain the conditions under which the monopolistically competitive firm in the short run will:
Achieve economic profit
Minimize economic loss
KEY TERMS
