Chapter
12
Monopolistic Competition:
The Competitive Model in
a More Realistic Setting
Prepared by:
Fernando & Yvonn Quijano
© 2008 Prentice Hall Business Publishing Economics R. Glenn Hubbard, Anthony Patrick O’Brien, 2e.
Starbucks: Growth
through Product
Differentiation
Learning Objectives
12.1 Explain why a monopolistically
competitive firm has downwardsloping demand and marginal
revenue curves.
12.2 Explain how a monopolistically
competitive firm maximizes
profits in the short run.
12.3 Analyze the situation of a
monopolistically competitive firm
in the long run.
12.4 Compare the efficiency of
monopolistic competition and
perfect competition.
The coffeehouse market
is monopolistically
competitive rather than
perfectly competitive.
12.5 Define marketing and explain
how firms use it to differentiate
their products.
12.6 Identify the key factors that
determine a firm’s success.
© 2008 Prentice Hall Business Publishing Economics R. Glenn Hubbard, Anthony Patrick O’Brien, 2e.
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Chapter 12: Monopolistic Competition: The Competitive Model
in a More Realistic Setting
Monopolistic Competition: The Competitive Model
in a More Realistic Setting
Monopolistic competition
A market structure in which barriers
to entry are low and many firms
compete by selling similar, but not
identical, products.
© 2008 Prentice Hall Business Publishing Economics R. Glenn Hubbard, Anthony Patrick O’Brien, 2e.
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Chapter 12: Monopolistic Competition: The Competitive Model
in a More Realistic Setting
Learning Objective 12.1
Demand and Marginal Revenue for a Firm
in a Monopolistically Competitive Market
The Demand Curve for a Monopolistically Competitive Firm
FIGURE 12-1
The Downward-Sloping Demand
for Caffè Lattes at a Starbucks
© 2008 Prentice Hall Business Publishing Economics R. Glenn Hubbard, Anthony Patrick O’Brien, 2e.
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Chapter 12: Monopolistic Competition: The Competitive Model
in a More Realistic Setting
Learning Objective 12.1
Demand and Marginal Revenue for a Firm
in a Monopolistically Competitive Market
Marginal Revenue for a Firm with a Downward-Sloping
Demand Curve
Table 12-1
Demand and Marginal Revenue
at a Starbucks
CAFFÈ LATTES SOLD
PER WEEK (Q)
PRICE (P)
TOTAL
REVENUE
(TR = P x Q)
0
1
2
3
4
5
6
7
8
9
10
$6.00
5.50
5.00
4.50
4.00
3.50
3.00
2.50
2.00
1.50
1.00
$0.00
5.50
10.00
13.50
16.00
17.50
18.00
17.50
16.00
13.50
10.00
AVERAGE
REVENUE
(AR = TR/Q)
MARGINAL
REVENUE
(MR = ΔTR/ΔQ)
―
$5.50
5.00
4.50
4.00
3.50
3.00
2.50
2.00
1.50
1.00
―
$5.50
4.50
3.50
2.50
1.50
0.50
–0.50
–1.50
–2.50
–3.50
© 2008 Prentice Hall Business Publishing Economics R. Glenn Hubbard, Anthony Patrick O’Brien, 2e.
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Chapter 12: Monopolistic Competition: The Competitive Model
in a More Realistic Setting
Learning Objective 12.1
Demand and Marginal Revenue for a Firm
in a Monopolistically Competitive Market
Marginal Revenue for a Firm with a Downward-Sloping
Demand Curve
FIGURE 12-2
How a Price Cut Affects a Firm’s Revenue
© 2008 Prentice Hall Business Publishing Economics R. Glenn Hubbard, Anthony Patrick O’Brien, 2e.
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Chapter 12: Monopolistic Competition: The Competitive Model
in a More Realistic Setting
Learning Objective 12.1
Demand and Marginal Revenue for a Firm
in a Monopolistically Competitive Market
Marginal Revenue for a Firm with a Downward-Sloping
Demand Curve
FIGURE 12-3
The Demand and Marginal
Revenue Curves for a
Monopolistically
Competitive Firm
© 2008 Prentice Hall Business Publishing Economics R. Glenn Hubbard, Anthony Patrick O’Brien, 2e.
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Chapter 12: Monopolistic Competition: The Competitive Model
in a More Realistic Setting
How a Monopolistically Competitive
Firm Maximizes Profits
in the Short Run
Learning Objective 12.2
FIGURE 12-4
Maximizing Profit in a
Monopolistically
Competitive Market
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Learning Objective 12.2
Chapter 12: Monopolistic Competition: The Competitive Model
in a More Realistic Setting
Solved Problem
12-2
How Not to Maximize Profits at a Publishing Company
If you were a manager at a
publishing firm, how would you
determine whether producing
one more copy of a book will
increase your profits?
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Learning Objective 12.3
Chapter 12: Monopolistic Competition: The Competitive Model
in a More Realistic Setting
What Happens to Profits in the Long Run?
How Does the Entry of New Firms Affect
the Profits of Existing Firms?
FIGURE 12-5
How Entry of New Firms Eliminates Profits
Don’t Let This Happen to YOU!
Don’t Confuse Zero Economic Profit with Zero Accounting Profit
© 2008 Prentice Hall Business Publishing Economics R. Glenn Hubbard, Anthony Patrick O’Brien, 2e.
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Learning Objective 12.3
Chapter 12: Monopolistic Competition: The Competitive Model
in a More Realistic Setting
What Happens to Profits in the Long Run?
How Does the Entry of New Firms Affect
the Profits of Existing Firms?
Table 12-2
The Short Run and
the Long Run for a
Monopolistically
Competitive Firm
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Learning Objective 12.3
Chapter 12: Monopolistic Competition: The Competitive Model
in a More Realistic Setting
Making
the
Connection
The Rise and Fall of Apple’s
Macintosh Computer
Macintosh lost its differentiation, but still has a loyal—
if relatively small—following.
© 2008 Prentice Hall Business Publishing Economics R. Glenn Hubbard, Anthony Patrick O’Brien, 2e.
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Learning Objective 12.3
Chapter 12: Monopolistic Competition: The Competitive Model
in a More Realistic Setting
Solved Problem
12-3
The Short Run and the Long Run for the Macintosh
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Learning Objective 12.3
Chapter 12: Monopolistic Competition: The Competitive Model
in a More Realistic Setting
What Happens to Profits in the Long Run?
Is Zero Economic Profit Inevitable in the Long Run?
A firm’s profits will be eliminated in
the long run only if a firm stands still
and fails to find new ways of
differentiating its product or fails to
find new ways of lowering the cost
of producing its product.
© 2008 Prentice Hall Business Publishing Economics R. Glenn Hubbard, Anthony Patrick O’Brien, 2e.
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Learning Objective 12.3
Chapter 12: Monopolistic Competition: The Competitive Model
in a More Realistic Setting
Making Staying One Step Ahead of the
Competition: Eugène Schueller
Connection and L’Oréal
the
Unlike many monopolistically competitive firms, L’Oréal
has earned economic profits for a very long time.
© 2008 Prentice Hall Business Publishing Economics R. Glenn Hubbard, Anthony Patrick O’Brien, 2e.
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Chapter 12: Monopolistic Competition: The Competitive Model
in a More Realistic Setting
Learning Objective 12.4
Comparing Perfect Competition
and Monopolistic Competition
Monopolistic competition and perfect competition share the
characteristic that in long-run equilibrium, firms earn zero
economic profits.
However, there are two important differences between longrun equilibrium in the two markets:
• Monopolistically competitive firms charge a price
greater than marginal cost.
• Monopolistically competitive firms do not produce at
minimum average total cost.
© 2008 Prentice Hall Business Publishing Economics R. Glenn Hubbard, Anthony Patrick O’Brien, 2e.
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Chapter 12: Monopolistic Competition: The Competitive Model
in a More Realistic Setting
Learning Objective 12.4
Comparing Perfect Competition
and Monopolistic Competition
Excess Capacity under Monopolistic Competition
FIGURE 12-6
Comparing Long-Run Equilibrium under Perfect
Competition and Monopolistic Competition
© 2008 Prentice Hall Business Publishing Economics R. Glenn Hubbard, Anthony Patrick O’Brien, 2e.
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Chapter 12: Monopolistic Competition: The Competitive Model
in a More Realistic Setting
Learning Objective 12.4
Comparing Perfect Competition
and Monopolistic Competition
Is Monopolistic Competition Inefficient?
Economists have debated whether monopolistically
competitive markets being neither productively nor
allocatively efficient results in a significant loss of
well-being to society in these markets compared with
perfectly competitive markets.
How Consumers Benefit from Monopolistic Competition
Consumers benefit from being able to purchase a
product that is differentiated and more closely suited
to their tastes.
© 2008 Prentice Hall Business Publishing Economics R. Glenn Hubbard, Anthony Patrick O’Brien, 2e.
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Learning Objective 12.4
Chapter 12: Monopolistic Competition: The Competitive Model
in a More Realistic Setting
Making
the
Connection
Abercrombie & Fitch: Can the
Product Be Too Differentiated?
Did Abercrombie and Fitch narrow its target market
too much?
© 2008 Prentice Hall Business Publishing Economics R. Glenn Hubbard, Anthony Patrick O’Brien, 2e.
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Learning Objective 12.5
Chapter 12: Monopolistic Competition: The Competitive Model
in a More Realistic Setting
How Marketing Differentiates Products
Marketing All the activities
necessary for a firm to sell a
product to a consumer.
Brand Management
Brand management The
actions of a firm intended to
maintain the differentiation of
a product over time.
© 2008 Prentice Hall Business Publishing Economics R. Glenn Hubbard, Anthony Patrick O’Brien, 2e.
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Learning Objective 12.5
Chapter 12: Monopolistic Competition: The Competitive Model
in a More Realistic Setting
How Marketing Differentiates Products
Advertising
If the increase in revenue that results from the
advertising is greater than the increase in costs, the
firm’s profits will rise.
Defending a Brand Name
A firm can apply for a trademark, which grants legal
protection against other firms using its product’s
name.
© 2008 Prentice Hall Business Publishing Economics R. Glenn Hubbard, Anthony Patrick O’Brien, 2e.
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Learning Objective 12.6
Chapter 12: Monopolistic Competition: The Competitive Model
in a More Realistic Setting
What Makes a Firm Successful?
FIGURE 12-7
What Makes a Firm Successful?
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Learning Objective 12.6
Chapter 12: Monopolistic Competition: The Competitive Model
in a More Realistic Setting
Making
the
Connection
Is Being the First Firm in the
Market a Key to Success?
Although not first to market, Bic ultimately
was more successful than the firm that
pioneered ballpoint pens.
© 2008 Prentice Hall Business Publishing Economics R. Glenn Hubbard, Anthony Patrick O’Brien, 2e.
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Chapter 12: Monopolistic Competition: The Competitive Model
in a More Realistic Setting
An Inside LOOK
Can Dunkin’ Donuts Really
Compete with Starbucks?
Brewing Battle: Dunkin’ Donuts Tries to Go Upscale,
but Not too Far
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Chapter 12: Monopolistic Competition: The Competitive Model
in a More Realistic Setting
Key Terms
Brand management
Marketing
Monopolistic competition
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