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Monopolistic Competition

Monopolistic Competition. Topics to be Discussed. Characteristics of Monopolistic Competition Short & Long-run Equilibrium Comparison with Perfectly Competitive Equilibrium Efficiency Considerations. Characteristics of Monopolistic Competition. Many firms Free entry and exit

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Monopolistic Competition

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  1. Monopolistic Competition

  2. Topics to be Discussed • Characteristics of Monopolistic Competition • Short & Long-run Equilibrium • Comparison with Perfectly Competitive Equilibrium • Efficiency Considerations

  3. Characteristics of Monopolistic Competition • Many firms • Free entry and exit • Differentiated but highly substitutable products (hence conjectural variation is close to zero, if not exactly zero) • Amount of monopoly power depends on the degree of differentiation) • The greater the consumer preference towards differentiated product, the higher the price

  4. MC MC AC AC PSR PLR DSR DLR MRSR MRLR QSR QLR A Monopolistically CompetitiveFirm in the Short and Long Run $/Q $/Q Short Run Long Run Quantity Quantity

  5. A Monopolistically CompetitiveFirm in the Short and Long Run • Short-run • Downward sloping demand--differentiated product, demand is relatively elastic--good substitutes • MC=MR < P => Firm makes economic profits • Long-run • Profits will attract new firms to the industry (no barriers to entry) • No economic profit (P = AC), but P > MC => some monopoly power

  6. Deadweight loss MC AC MC AC P PC D = MR DLR MRLR QC QMC Comparison of Monopolistically CompetitiveEquilibrium and Perfectly Competitive Equilibrium Monopolistically Competitive Firm Perfect Competitive Firm $/Q $/Q Quantity Quantity

  7. Monopolistic Competition and Economic Efficiency • The monopoly power (differentiation) yields a higher price than perfect competition. • Although there are no economic profits in the long run, the firm is still not producing at minimum AC and excess capacity exists. • Variety in closely substitutable products, monopolistically competition offers to consumers to choose from, is also a dynamic efficiency gain to the society.

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