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Chapter16MonopolisticCompetition.pptx1
Principles of Economics, Ninth Edition N. Gregory Mankiw
N. Gregory Mankiw, Principles of Economics, 9th Edition © 2021 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
PowerPoint Slides prepared by:
V. Andreea CHIRITESCU
Eastern Illinois University
N. Gregory Mankiw Principles Of Economics Ninth Edition
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Chapter 16
Monopolistic Competition
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N. Gregory Mankiw, Principles of Economics, 9th Edition © 2021 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Monopolistic Competition, Part 1
Imperfect competition
Between perfect competition and monopoly
Oligopoly
Monopolistic competition
Oligopoly
Few sellers
Offer similar or identical products
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N. Gregory Mankiw, Principles of Economics, 9th Edition © 2021 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Monopolistic Competition, Part 2
Concentration ratio
Percentage of total output in the market supplied by the four largest firms
Oligopolies, highly-concentrated industries (concentration ratio %)
Major household appliances (90%)
Tires (91%), Light bulbs (92%)
Soda (94%)
Wireless telecommunications (95%)
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N. Gregory Mankiw, Principles of Economics, 9th Edition © 2021 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Monopolistic Competition, Part 3
Monopolistic competition
Many sellers
Product differentiation
Not price takers
Downward sloping demand curve
Free entry and exit
Zero economic profit in the long run
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N. Gregory Mankiw, Principles of Economics, 9th Edition © 2021 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Figure 1 The Four Types of Market Structure
Economists who study industrial organization divide markets into four types—monopoly, oligopoly, monopolistic competition, and perfect competition.
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N. Gregory Mankiw, Principles of Economics, 9th Edition © 2021 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Short Run Equilibrium
Profit maximization
Produce the quantity where marginal revenue = marginal cost
Price: on the demand curve
If P > ATC: profit
If P < ATC: loss
Similar to monopoly
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N. Gregory Mankiw, Principles of Economics, 9th Edition © 2021 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Figure 2 Monopolistic Competitors in the Short Run
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N. Gregory Mankiw, Principles of Economics, 9th Edition © 2021 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Long Run Equilibrium, Part 1
If firms are making profit in short run
New firms - incentive to enter the market
Increase number of products
Reduces demand faced by each firm
Demand curve shifts left
Each firm’s profit declines until: zero economic profit
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N. Gregory Mankiw, Principles of Economics, 9th Edition © 2021 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Figure 3 A Monopolistic Competitor in Long Run
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N. Gregory Mankiw, Principles of Economics, 9th Edition © 2021 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Long Run Equilibrium, Part 2
Zero economic profit
Demand curve
Tangent to average total cost curve
At quantity where marginal revenue = marginal cost
Price = average total cost
Price exceeds marginal cost
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N. Gregory Mankiw, Principles of Economics, 9th Edition © 2021 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Long Run Equilibrium, Part 3
Monopolistic versus perfect competition
Monopolistic competition
Quantity: not at minimum ATC (excess capacity)
P > MC, markup over marginal cost
Perfect competition
Quantity: at minimum ATC (efficient scale)
P = MC
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N. Gregory Mankiw, Principles of Economics, 9th Edition © 2021 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Figure 4 Monopolistic versus Perfect Competition
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N. Gregory Mankiw, Principles of Economics, 9th Edition © 2021 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Welfare of Society
Sources of inefficiency
Markup of price over marginal cost
Deadweight loss of monopoly pricing
Too much or too little entry
Product-variety externality (positive externality on consumers)
Business-stealing externality (negative externality on existing firms)
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N. Gregory Mankiw, Principles of Economics, 9th Edition © 2021 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Advertising, Part 1
Incentive to advertise
When firms sell differentiated products and charge prices above marginal cost
Advertise to attract more buyers
Advertising spending
Highly differentiated goods: 10-20% of revenue
Industrial products: Little advertising
Homogenous products: No advertising
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N. Gregory Mankiw, Principles of Economics, 9th Edition © 2021 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Advertising, Part 2
Debate over advertising
Wasting resources?
Valuable purpose?
The critique of advertising
Firms advertise to manipulate people’s tastes
Psychological rather than informational
Creates a desire that otherwise might not exist
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N. Gregory Mankiw, Principles of Economics, 9th Edition © 2021 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Advertising, Part 3
The critique of advertising
Impedes competition
Increase perception of product differentiation
Foster brand loyalty
Makes buyers less concerned with price differences among similar goods
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N. Gregory Mankiw, Principles of Economics, 9th Edition © 2021 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Advertising, Part 4
The defense of advertising
Provide information to customers
Customers - make better choices
Enhances the ability of markets to allocate resources efficiently
Fosters competition
Customers - take advantage of price differences
Allows new firms to enter more easily
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N. Gregory Mankiw, Principles of Economics, 9th Edition © 2021 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Advertising and the Price of Eyeglasses, Part 1
What effect does advertising have on the price of a good?
Consumers – view products as being more different than they otherwise would
Markets less competitive
Firms’ demand curves less elastic
Higher prices
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N. Gregory Mankiw, Principles of Economics, 9th Edition © 2021 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Advertising and the Price of Eyeglasses, Part 2
What effect does advertising have on the price of a good?
Consumers – easier to find firms with the best prices
Markets – more competitive
Firms’ demand curves more elastic
Lower prices
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N. Gregory Mankiw, Principles of Economics, 9th Edition © 2021 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Advertising and the Price of Eyeglasses, Part 3
1972, economist Lee Benham
States that prohibited advertising
Average price = $33 ($272 in 2018 dollars)
States that did not restrict advertising
Average price = $26 ($214 in 2018 dollars)
Advertising
Reduced average prices
Fosters competition
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N. Gregory Mankiw, Principles of Economics, 9th Edition © 2021 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Advertising, Part 5
Advertising as a signal of quality
Little apparent information
Real information offered – a signal
Willingness to spend large
amount of money
= signal about quality of the product
Content of advertising = irrelevant
Is it rational for consumers to be impressed that
George Clooney is endorsing this product?
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N. Gregory Mankiw, Principles of Economics, 9th Edition © 2021 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Advertising, Part 6
Brand names
Spend more on advertising and charge higher prices than generic substitutes
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N. Gregory Mankiw, Principles of Economics, 9th Edition © 2021 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Advertising, Part 7
Critics of brand names
Products – not differentiated
Irrationality: consumers are willing to pay more for brand names
Defenders of brand names
Consumers – information about quality
Firms – incentive to maintain high quality
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N. Gregory Mankiw, Principles of Economics, 9th Edition © 2021 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Table 1 Monopolistic Competition: Between Perfect Competition and Monopoly
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N. Gregory Mankiw, Principles of Economics, 9th Edition © 2021 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
