Monopolistic Competition
Microeconomics
TPS
 Write down a list of restaurants which serve basically the
same food.
Monopolistic Competition
Defining Monopolistic Competition
 Somewhere between
 Perfect competition and an Oligopoly
Many firms but NOT as many as PC
Differentiated product
Each firm has some ability to set the price of their
product.
No barriers to entry and exit.
Inefficient market
Monopolistic Competition
in the Short Run
Short-run economic profit encourages firms to enter
the market
TT = MR = MC at Q
P = intersection of Q and MR = MC
Positive economics profit is P > ATC
Monopolistic Competition
in the Short Run
Firm Makes Profit
Price
MC
ATC
Price
Average
total cost
Demand
Profit
MR
0
Profitmaximizing
quantity
Quantity
Monopolistic Competition
in the Short Run
 Short-run economic losses encourage firms to exit the
market.
Negative economics losses is P < ATC
Monopolistic Competitors
in the Short Run
Firm Makes Losses
Price
MC
ATC
Losses
Average
total cost
Price
MR
0
Lossminimizing
quantity
Demand
Quantity
Homework
 Multiple Choice – 1, 2, 3, 5, 6, 7
 Short Answer - 21
Monopolistic Competition
in Long-Run Equilibrium
Firms will enter and exit until the firms are making
exactly zero economic profits.
Monopolistic Competitor
in the Long Run
Price
MC
ATC
The demand curve is
tangent to the ATC
curve.
P = ATC
And this tangency lies
vertically above the
intersection of MR and
MC.
Demand
MR
0
Profit-maximizing
quantity
Quantity
Monopolistic Competition
versus
Perfect Competition
Two differences
Excess capacity
Markup over marginal cost
Monopolistic
versus
Perfect Competition
 Excess Capacity is …
 Firms produce less than the output at which ATC is
minimized
Monopolistic Competition
versus
Perfect Competition
Monopolistically Competitive Firm
Perfectly Competitive Firm
Price
Price
MC
MC
ATC
ATC
P
P = MC
MR
0
Quantity
produced
Efficient
scale
P = MR
(demand
curve)
Demand
Quantity
0
Quantity produced =
Efficient scale
Quantity
Monopolistic Competition
versus
Perfect Competition
 Markup over Marginal Cost
 Markup = P - MC
More profit is generated
Monopolistic Competition
versus
Perfect Competition
Monopolistically Competitive Firm
Perfectly Competitive Firm
Price
Price
MC
MC
ATC
ATC
Markup
P
P = MC
P = MR
(demand
curve)
Marginal
cost
MR
0
Quantity
produced
Demand
Quantity
0
Quantity produced
Quantity
Monopolistic Competition
versus
Perfect Competition
Monopolistically Competitive Firm
Perfectly Competitive Firm
Price
Price
MC
MC
ATC
ATC
Markup
P
P = MC
P = MR
(demand
curve)
Marginal
cost
MR
0
Quantity
produced
Efficient
scale
Excess capacity
Demand
Quantity
0
Quantity produced =
Efficient scale
Quantity
Homework
 Multiple Choice – 4, 8, 9, 10, 11, 12
 Short Answer - 22
Product Differentiation
 Differentiation by Style or Type
Think pizza!!
Deep-dish crust v. thin crust v. stuffed crust
Consumers have different tastes
Producers able to increase profits by differentiating their
product.
Product Differentiation
 Differentiation by Location
Nearer to you is better than farther away.
You may be willing to pay more when it’s closer/more
convenient to/for you.
Product Differentiation
 Differentiation by Quality
Mercedes v. Kia
Prices higher for Mercedes due to perceived/actual
quality difference.
Advertising
 Advertising delivers two different messages:
 Information
 persuasive
Advertising
 Informative
 Store hours
 What we sell
 Extra services
Advertising
 Persuasive
 ‘yummiest French fries’
 ‘Just do it!’
 ‘this house is charming and located in a lovely
neighborhood.’
 Use of humor, celebrities, special effects and/or musical
jingles.
Brand Names
 Brand Names are …
 Owned by particular companies
 Used to differentiate products in consumer’s minds
 We think Kleenex for facial tissue. Many other brands of
facial tissue.
Name brand v. store brand.
 Ingredients essentially the same
 Name brand cost more.
Homework
 Multiple Choice – 13 - 19
 Short Answer – 23, 24
Monopolistic Competition:
Between Perfect Competition and Monopoly