Many buyers and sellers
Differentiated products
Easy entry and exit
Monopolistic competition is similar to
perfect competition in that:
◦ There are many buyers and sellers
◦ There are no barriers to entry or exit
Monopolistic competition is similar to
monopoly in that:
◦ Each firm is the sole producer of a particular
product (although there are close substitutes)
◦ The firm faces a downward sloping demand curve
for its product
As firms enter
a
monopolisticall
y competitive
market, the
demand facing
a typical firm
declines and
becomes more
elastic.
Economic profits
lead to entry and
a reduction in the
demand facing a
typical firm.
Entry
continues
until
economic
profit equals
zero for a
typical firm.
This
equilibrium is
often referred
to as a
“tangency
equilibrium.”
Monopolistically competitive firms may
receive short-run economic profit from
successful product differentiation and
advertising.
These profits are, however, expected to
disappear in the long run as other firms copy
successful innovations.
Monopolistically competitive firms often
locate near each other to appeal to the
“median” customer in a geographical region.
(e.g., fast food restaurants and car
dealerships)
Film about monopolistic competition
a small number of firms produce most output
a standardized or differentiated product
recognized mutual interdependence
difficult entry.
Strategic behavior occurs when the best
outcome for one firm depends upon the
actions and reactions of other firms.
Other firms are assumed to match price decreases,
but not price increases.
A
B
MC
AC
C
D
MR
O
Q
Examines the payoffs associated with alternative
choices of each participant in the “game.”
Prisoners’ dilemma (Film)
Duopoly pricing game
Joint profits are higher when firms behave as
a shared monopoly
Cartel arrangement is illegal in the U.S. and
UE
A cartel arrangement can maximize industry
profits
Each firm can increase its profits by violating
the agreement
Cartel agreements have generally been
unstable.
Film about oligopoly
http://www.oswego.edu/~kane/eco101.htm
Czarny B. „Podstawy ekonomii”, PWE, 2002
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