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Monopolistic Competition

Monopolistic Competition. Market Power, but zero profit in the long run Differentiated products: Representative Consumer Models People have a taste for variety Location Models Different people want different things Effect on Demand

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Monopolistic Competition

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  1. Monopolistic Competition • Market Power, but zero profit in the long run • Differentiated products: • Representative Consumer Models • People have a taste for variety • Location Models • Different people want different things • Effect on Demand • Inverse demand: Pi= D(q1, q2,…, qn)=100-2q1-3 q2 Linear Example: n=2 This slideshow was written by Ken Chapman, but is substantially based on concepts from Modern Industrial Organization by Carlton and Perloff, 4th edition, McGraw-Hill.

  2. Representative Consumer, Undifferentiated Products Cournot Example: Answer from Ch. 6: This slideshow was written by Ken Chapman, but is substantially based on concepts from Modern Industrial Organization by Carlton and Perloff, 4th edition, McGraw-Hill.

  3. Representative Consumer, Undifferentiated Products: Figure 7.1 Cents Monopolistically Competitive Equilibrium 46 44 36 AC MC 28 Output 80 This slideshow was written by Ken Chapman, but is substantially based on concepts from Modern Industrial Organization by Carlton and Perloff, 4th edition, McGraw-Hill.

  4. Representative Consumer, Undifferentiated Products • Summary • What happens as F increases? • To price? • To the number of firms? • To profit? • To Total Surplus (Welfare)? • Suppose products are differentiated • What happens to demand? • What happens to Welfare? • Is there sufficient product variety? This slideshow was written by Ken Chapman, but is substantially based on concepts from Modern Industrial Organization by Carlton and Perloff, 4th edition, McGraw-Hill.

  5. Figure 7.3 $ $ E D CS B AC Demand R C AC Demand Quantity, q Quantity, q

  6. Location Model • Hotelling: Fixed Prices 1 0 This slideshow was written by Ken Chapman, but is substantially based on concepts from Modern Industrial Organization by Carlton and Perloff, 4th edition, McGraw-Hill.

  7. Bertrand Competition: Linear Town PB PA x 1 .6 .2 0 100 people live in town This slideshow was written by Ken Chapman, but is substantially based on concepts from Modern Industrial Organization by Carlton and Perloff, 4th edition, McGraw-Hill.

  8. Finding Demand This slideshow was written by Ken Chapman, but is substantially based on concepts from Modern Industrial Organization by Carlton and Perloff, 4th edition, McGraw-Hill.

  9. Finding The Reaction Functions This slideshow was written by Ken Chapman, but is substantially based on concepts from Modern Industrial Organization by Carlton and Perloff, 4th edition, McGraw-Hill.

  10. Bertrand Equilibrium This slideshow was written by Ken Chapman, but is substantially based on concepts from Modern Industrial Organization by Carlton and Perloff, 4th edition, McGraw-Hill.

  11. What is the Bertrand/Nash Equilibrium? This slideshow was written by Ken Chapman, but is substantially based on concepts from Modern Industrial Organization by Carlton and Perloff, 4th edition, McGraw-Hill.

  12. Conclusions? • Principle of Maximum differentiation • Complications: • Be where the demand is • Positive externalities between firms • Price regulation This slideshow was written by Ken Chapman, but is substantially based on concepts from Modern Industrial Organization by Carlton and Perloff, 4th edition, McGraw-Hill.

  13. RTE Breakfast Cereals • 1972 FTC charge against the 4 largest RTE Breakfast serial manufacturers that brand proliferation was used to prevent entry. • 1950-1972: 6 leading producers introduced 80 brands and had 95% of all cereal sales • Didn’t enter the natural cereals market, and many companies moved into that market Niche. This slideshow was written by Ken Chapman, but is substantially based on concepts from Modern Industrial Organization by Carlton and Perloff, 4th edition, McGraw-Hill.

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