*Monopolistic
Competition
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Perfect
Competition
Monopolistic
Competition
Oligopoly
Pure
Monopoly
Characteristics of Monopolistic
Competition:
• Relatively Large Number of Sellers
• Differentiated Products
• Some control over price
• Easy Entry and Exit (Low Barriers)
• A lot of non-price competition
(Advertising)
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Examples:
1.
2.
3.
4.
5.
Fast Food Restaurants
Furniture companies
Jewelry stores
Hair Salons
Clothing Manufacturers
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“Monopoly” + ”Competition”
Monopolistic Qualities
• Control over price of own good due
to differentiated product
• D greater than MR
• Plenty of Advertising
• Not efficient
Perfect Competition Qualities
• Large number of smaller firms
• Relatively easy entry and exit
• Zero Economic Profit in Long-Run
since firms can enter/exit
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Differentiated Products
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Differentiated Products
• Goods are NOT identical.
• Firms seek to capture a piece of the
market by making unique goods.
• Since these products have substitutes,
firms use NON-PRICE Competition.
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Examples of NON-PRICE Competition
•Brand Names and Packaging
•Example?
•Product Attributes
•Example?
•Service
•Example?
•Location
•Example?
•Advertising
•Example?
•Two Goals
1. Increase Demand
2. Make demand more INELASTIC
Monopolistic Competition
*Firm’s demand curve
*How does it compare to previous models?
*Down-sloping and highly elastic (Why?)
*Elasticity depends on number of rivals and
degree of product differentiation
*Short run profit or loss
*How is profit maximized?
*Produce where MR=MC
*Long run profit/loss?
*Normal profit
*Easy entry and exit
*Inefficient
11-8
*Drawing
Monopolistic
Competition
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Monopolistic Competition is made up of
prices makers so MR is less than Demand
In the short-run, it is the same graph as a
monopoly making profit
P
MC
ATC
P1
In the long-run, new firms will Denter,
driving down the DEMAND for firms
already in the market.
MR
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Q1
Q
10
*Why does DEMAND shift?
When short-run profits are made…
*New firms enter.
*New firms mean more close substitutes
and less market shares for each existing
firm.
*Demand for each firm falls.
When short-run losses are made…
*Firms exit.
*Result is less substitutes and more market
shares for remaining firms.
*Demand for each firm rises.
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Firms enter so demand falls until there is no
economic profit
P
MC
ATC
P1
D
MR
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Q1
Q
12
Firms enter so demand falls until there is no
economic profit
Price and quantity falls and TR=TC
P
MC
ATC
PLR
D
MR
QLR
Q
13
LONG-RUN EQUILIBRIUM
Quantity where MR =MC up to Price = ATC
P
MC
ATC
PLR
D
MR
QLR
Q
14
What happens when there is a loss?
In the short-run, the graph is the same as a
monopoly making a loss
ATC
P
MC
P1
In the long-run, firms will leave, D
driving
up the DEMAND for firms already in the
market.
MR
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Q1
Q
15
Firms leave so demand increases until there
is no economic profit
ATC
P
MC
P1
D
MR
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Q1
Q
16
Firms leave so demand increases until there
is no economic profit
Price and quantity increase and TR=TC
ATC
P
MC
PLR
D
MR
QLR
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Q
17
*
*A normal profit is the result in the theoretical
model, but in the real world, variables can create
variation from the model.
*Stronger product differentiation may produce
more monopolistic power and long-term
economic profits
*Air Jordan, anyone?
*Barriers to entry may differ from industry to
industry
*Ex: Large scale shoe manufacturer vs. local
cobbler
*
*What three options can a
monopolistically competitive
firm undertake to gain/sustain
an economic profit?
*1. Reduce costs
*2. Increase demand (and
costs?) for their product
through differentiation
*3. Increase demand (and
costs) through advertising
*Are Monopolistically
Competitive Firms
Efficient?
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Long- Run Equilibrium
Not Allocatively Efficient because P  MC
Not Productively Efficient because not producing
at Minimum ATC
P
MC ATC
PLR
D
MR
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QLR
QProd Efficient
QSocially Optimal
Q
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Long- Run Equilibrium
This firm also has EXCESS CAPACITY
P
MC ATC
PLR
D
MR
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QLR
QProd Efficient
Q
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Excess Capacity
• Given current resources, the firm can
produce at the lowest costs (minimum
ATC) but they decide not to.
• The gap between the minimum ATC
output and the profit maximizing
output.
• Not the amount underproduced
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Long- Run Equilibrium
The firm can produce at a lower cost but it
holds back production to maximize profit
P
MC ATC
PLR
D
Excess
Capacity
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MR
QLR
QProd Efficient
Q
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Monopolistic Competition is
inefficient, but other benefits
accrue to society…
• Product Variety
– More Choices!
– #AMERICA!
• Innovation
– Better Stuff!
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Practice Question
Assume there is a monopolistically
competitive firm in long-run equilibrium. If
this firm were to realize productive
efficiency, it would:
A) have more economic profit.
B) have a loss.
C) also achieve allocative efficiency.
D) be under producing.
E) be in long-run equilibrium.
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2008 Audit Exam