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Monopolistic Competition

Monopolistic Competition. Monopolistic Competition. Perfect Competition. Pure Monopoly. Oligopoly. Characteristics of Monopolistic Competition:. Relatively Large Number of Sellers Differentiated Products Some control over price Easy Entry and Exit (Low Barriers)

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Monopolistic Competition

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  1. Monopolistic Competition

  2. Monopolistic Competition Perfect Competition Pure Monopoly Oligopoly 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)

  3. Examples: • Fast Food Restaurants • Furniture companies • Jewelry stores • Hair Salons • Clothing Manufacturers

  4. “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

  5. 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. Examples of NON-PRICE Competition • Brand Names and Packaging • Product Attributes • Service • Location • Advertising (Two Goals) 1. Increase Demand 2. Make demand more INELASTIC

  6. Obey your Thirst • Sprite • Is it in you • Gatorade • My heart to yours • Pillsbury • Two for me, none for you • Twix • Hungry, why wait? • Snickers • Give me a break • Kit Kat • Like a good neighbor… • State Farm Name The Product

  7. There is no wrong way to eat a • Reese’s • I’m love’n it • McDonalds • Once you pop you can’t stop • Pringles • Choosy mothers choose _______. • Jiff • You can do it, we can help. • Home Depot • Zoom, zoom, zoom • Mazda • What is in your wallet? • Capital One Name The Product

  8. It just keeps going and going and going… • Energizer • Bet ya can’t eat just one. • Lays Potato Chips • Double your pleasure, double your fun • Doublemint Gum • Have it your way • Burger King • Don’t leave home without it. • American Express • The quicker picker upper. • Bounty Name The Product

  9. Review • Identify the 4 market structures. • Define Price Discrimination. • List characteristics of monopolistic competition. • List Monopolistic Qualities. • List Competitive Qualities.

  10. Drawing Monopolistic Competition

  11. 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 enter, driving down the DEMAND for firms already in the market. D MR Q Q1 11

  12. Firms enter so demand falls until there is no economic profit P MC ATC P1 D MR Q Q1 12

  13. Firms enter so demand falls until there is no economic profit Price and quantity falls and TR=TC P MC ATC PLR D MR Q QLR 13

  14. LONG-RUN EQUILIBRIUM Quantity where MR =MC up to Price = ATC P MC ATC PLR D MR Q QLR 14

  15. 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.

  16. 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, driving up the DEMAND for firms already in the market. D MR Q Q1 16

  17. Firms leave so demand increases until there is no economic profit ATC P MC P1 D MR Q Q1 17

  18. 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 Q 18

  19. Are Monopolistically Competitive Firms Efficient?

  20. LONG-RUN EQUILIBRIUM Not Allocatively Efficient because P MC Not Productively Efficient because not producing at Minimum ATC P ATC MC PLR D MR Q QLR QSocially Optimal 20

  21. LONG-RUN EQUILIBRIUM This firm also has EXCESS CAPACITY P ATC MC PLR D MR Q QLR QSocially Optimal 21

  22. 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

  23. LONG-RUN EQUILIBRIUM The firm can produce at a lower cost but it holds back production to maximize profit P ATC MC PLR D Excess Capacity MR Q QLR QProd Efficient 23

  24. 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.

  25. Advantages of MONOPOLISTIC COMPETITION • Large number of firms and product variation meets societies needs. • Nonprice Competition (product differentiation and advertising) may result in sustained profits for some firms. Ex: Nike might continue to make above normal profit because they are a well known brand.

  26. FOUR MARKET MODELS

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