Monopolistic
Competition
Monopolistic Competition (m.c.)
 large
number of independent sellers
 no or low barriers to entry
 differentiated product
differentiated products
products that are distinguished from similar
products by such characteristics as quality,
design, and location.
examples: service stations, aspirin, tissues,
retail stores
Demand Curve for the
Monopolistic Competitor’s Product
Since the product is differentiated, there is
some brand loyalty and the firm has some
control over price.
Since there are good substitutes available,
however, the demand curve is fairly elastic.
The demand curve for the monopolistic competitor’s
product is flatter than the demand curve for the
monopolist’s product, but not horizontal like the
demand curve for the perfect competitor’s product.
p.c.
m.c.
P
monopoly
P
D
P
D
Q
Q
D
Q
Apart from the fact that the demand curve
for the monopolistic competitor’s product is
technically flatter than the demand curve for
the monopolist’s product, the graphs look
essentially the same.
Monopolistic Competitor making
positive economic profits
Profit-maximizing output: where MR = MC
MC
$
ATC
MR
Q*
D
quantity
Determine the price
from the demand curve, above Q*.
MC
$
ATC
P*
MR
Q*
D
quantity
Determine the cost per unit
from the ATC curve, above Q*.
MC
$
ATC
P*
ATC*
MR
Q*
D
quantity
Determine the TR = PQ box.
MC
$
ATC
P*
ATC*
MR
Q*
D
quantity
Determine the TC = ATC . Q box.
MC
$
ATC
P*
ATC*
MR
Q*
D
quantity
The difference between TR and TC is profit.
MC
$
P*
ATC*
ATC
profit
MR
Q*
D
quantity
Monopolistic Competitor
with a loss
Profit-maximizing or loss-minimizing output:
where MR = MC
MC
ATC
$
AVC
MR
Q*
D
quantity
Determine the price
from the demand curve, above Q*
MC
ATC
$
AVC
P*
MR
Q*
D
quantity
Determine the cost per unit
from the ATC curve, above Q*
MC
ATC
$
ATC*
P*
AVC
MR
Q*
D
quantity
Determine the TC = ATC . Q box
MC
ATC
$
ATC*
P*
AVC
MR
Q*
D
quantity
Determine the TR = PQ box.
MC
ATC
$
ATC*
P*
AVC
MR
Q*
D
quantity
The difference between TR and TC
is profit or loss.
MC
$
ATC*
P*
ATC
AVC
loss
MR
Q*
D
quantity
Monopolistic Competitor Breaking
Even (Zero Economic Profit)
Profit-maximizing output: where MR = MC
(directly below the tangency of D and ATC)
MC
$
ATC
MR
Q*
D
quantity
Determine the price
from the demand curve, above Q*
MC
$
ATC
P*
MR
Q*
D
quantity
Determine the cost per unit
from the ATC curve, above Q*
MC
$
ATC
ATC* = P*
MR
Q*
D
quantity
Determine the TR = PQ box.
MC
$
ATC
ATC* = P*
MR
Q*
D
quantity
Determine the TC = ATC . Q box.
MC
$
ATC
ATC* = P*
MR
Q*
D
quantity
Since TR = TC, profit is zero.
MC
$
ATC
ATC* = P*
MR
Q*
D
quantity
Possibilities for the
Monopolistic Competitor
short run:
positive profits, losses, or breaking even.
long run:
breaking even.
Similarities between perfect competition
and monopolistic competition
 Profits
must be zero in long run equilibrium.
 Firms are responsive to changes in demand
conditions.
 Competition in the pursuit of profit encourages
resource movements that are efficient.
Differences between perfect competition
and monopolistic competition
 In
long run equilibrium, the perfectly competitive firm
is at the minimum of the ATC curve.
The monopolistically competitive firm is not.
 For perfectly competitive firms, P = MC.
For monopolistically competitive firms, P > MC.
 Perfectly competitive firms don’t advertise because
everyone knows the products are all the same.
Monopolistic competitors advertise to convince
consumers that their product is better than others.
Price Discrimination
when a seller charges different prices to
different consumers for the same product or
service.
Examples
Charging different prices for movie admission
to students and senior citizens and to other
customers is price discrimination.
Charging different prices for movie admission
on a Wednesday afternoon and on a
Saturday night is not price discrimination
because the products are not the same.
Requirements for Price
Discrimination to Occur
 Firm
must have some control over price.
(So perfect competitors can not price
discriminate, but monopolistic competitors,
monopolists, and oligopolists can.)
 Firm must be able to separate consumers
into different identifiable groups.
 The different groups must have different
elasticities.
The price discriminating firm charges the
group with the higher elasticity a lower
price.