Monopolistic Competition
Market Power, but zero profit in the long
run
 Differentiated products:


Representative Consumer Models


Location Models


People have a taste for variety
Linear Example: n=2
Different people want different things
Effect on Demand

Inverse demand: Pi= D(q1, q2,…, qn)=100-2q1-3 q2
This slideshow was written by Ken Chapman, but is substantially based on concepts from
Modern Industrial Organization by Carlton and Perloff, 4th edition, McGraw-Hill.
Representative Consumer,
Undifferentiated Products
Cournot Example:
Answer from Ch. 6:
Demand:
Cost:
Average Cost:
Firm's output:
Price:
Profit of firm:
Q  1, 000  1, 000 p
C (q)  .28q  F
AC  0.28  F / q
720
n+1
1
P= +.28
n
5.184
 ( n) 
F
2
 n  1
q=
This slideshow was written by Ken Chapman, but is substantially based on concepts from
Modern Industrial Organization by Carlton and Perloff, 4th edition, McGraw-Hill.
Representative Consumer,
Undifferentiated Products: Figure 7.1
Cents
Monopolistically Competitive
Equilibrium
46
44
36
AC
MC
28
D f (7) =Residual Demand with 7 firms
D f (8) =Residual Demand with 8 firms
Output
80
MR f (8)
This slideshow was written by Ken Chapman, but is substantially based on concepts from
Modern Industrial Organization by Carlton and Perloff, 4th edition, McGraw-Hill.
Representative Consumer,
Undifferentiated Products

Summary

What happens as F increases?





To
To
To
To
price?
the number of firms?
profit?
Total Surplus (Welfare)?
Suppose products are differentiated


What happens to demand?
What happens to Welfare?
 Is there sufficient product variety?
This slideshow was written by Ken Chapman, but is substantially based on concepts from
Modern Industrial Organization by Carlton and Perloff, 4th edition, McGraw-Hill.
Figure 7.3
$
$
E
CS
B

D
AC
Demand
C
R
AC
Demand
Quantity, q
CS    C
CS+
CS
 C
C

Quantity, q
Social Benefit
Welfare
EBR
ED
Consumer Surplus
Revenue
Cost
BE
R
RBD
Profit
( B  D )
Location Model

Hotelling: Fixed Prices
1
0
This slideshow was written by Ken Chapman, but is substantially based on concepts from
Modern Industrial Organization by Carlton and Perloff, 4th edition, McGraw-Hill.
Bertrand Competition: Linear Town
PB
PA
0
.2
x
1
.6
100 people live in town
This slideshow was written by Ken Chapman, but is substantially based on concepts from
Modern Industrial Organization by Carlton and Perloff, 4th edition, McGraw-Hill.
Finding Demand
This slideshow was written by Ken Chapman, but is substantially based on concepts from
Modern Industrial Organization by Carlton and Perloff, 4th edition, McGraw-Hill.
Finding The Reaction Functions
This slideshow was written by Ken Chapman, but is substantially based on concepts from
Modern Industrial Organization by Carlton and Perloff, 4th edition, McGraw-Hill.
Bertrand Equilibrium
3
2.5
2
Firm B's Reaction Function
1.5
1
Firm A's Reaction Function
0.5
0
1
9
17
25
33
41
49
57
65
73
81
89
97 105 113 121 129 137 145 153 161 169 177 185 193 201 209 217 225
This slideshow was written by Ken Chapman, but is substantially based on concepts from
Modern Industrial Organization by Carlton and Perloff, 4th edition, McGraw-Hill.
What is the Bertrand/Nash Equilibrium?
This slideshow was written by Ken Chapman, but is substantially based on concepts from
Modern Industrial Organization by Carlton and Perloff, 4th edition, McGraw-Hill.
Conclusions?
Principle of Maximum differentiation
 Complications:




Be where the demand is
Positive externalities between firms
Price regulation
This slideshow was written by Ken Chapman, but is substantially based on concepts from
Modern Industrial Organization by Carlton and Perloff, 4th edition, McGraw-Hill.
RTE Breakfast Cereals

1972 FTC charge against the 4 largest RTE
Breakfast serial manufacturers that brand
proliferation was used to prevent entry.


1950-1972: 6 leading producers introduced 80
brands and had 95% of all cereal sales
Didn’t enter the natural cereals market, and
many companies moved into that market
Niche.
This slideshow was written by Ken Chapman, but is substantially based on concepts from
Modern Industrial Organization by Carlton and Perloff, 4th edition, McGraw-Hill.