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Monopolistic Competition

Monopolistic Competition. Monopolistic Competition. Monopolistic competition occurs if many firms serve a market with free entry and exit, but in which one firm’s products are not perfect substitutes for the products of other firms. Monopolistic Competition.

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Monopolistic Competition

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  1. Monopolistic Competition

  2. Monopolistic Competition • Monopolistic competition occurs if many firms serve a market with free entry and exit, but in which one firm’s products are not perfect substitutes for the products of other firms.

  3. Monopolistic Competition • Assumptions of monopolistic competition • large number of firms • freedom of entry • differentiated product (product differentiation)‏ • Chamberlain – SELLING COST • downward-sloping demand curve

  4. MonopolisticCompetition • Selling Cost • Demand is not determined by price alone • Style, services, Selling activities • Shift in demand due to these factors • U Shaped • Product Differentiation • Real (inherent characteristics different) and • Fancied (product is same; consumer is persuaded)‏ • Firm is NOT a price taker but the price determination is limited

  5. MonopolisticCompetition • Industry and Product Group • Industry: Same products • Product Group: Closely related products • High price and cross elasticities

  6. Short run equilibrium of the firm Rs MC AC Ps AR D MR O Qs Q

  7. Short run equilibrium of the firm Rs MC AC Ps ACs AR D MR O Qs Q

  8. Short run equilibrium of the firm Rs MC AC Ps ACs AR D MR O Qs Q

  9. MonopolisticCompetition • Assumptions of monopolistic competition • large number of firms • freedom of entry • differentiated product • downward-sloping demand curve • Equilibrium of the firm • short run • long run

  10. Long run equilibrium of the firm Rs LRMC LRAC Ps PL SAR ARLDL SMR Qs O MRL QL Q

  11. Monopolistic Competition • Assumptions of monopolistic competition • large number of firms • freedom of entry • differentiated product • downward-sloping demand curve • Equilibrium of the firm • short run • long run • underutilization of capacity in long run

  12. Excess capacity in the long run Rs LRMC LRAC a b PL ARLDL MRL O QL Q

  13. MonopolisticCompetition • Limitations of the model • imperfect information • difficulty in identifying industry demand curve • entry may not be totally free • indivisibilities • importance of non-price competition • Comparing monopolistic competition with perfect competition and monopoly • comparison with perfect competition

  14. MonopolisticCompetition • ‘Group’ Equilibrium • Product group • Technical substitutability • Economic substitutability • Within group each firm has its own demand curve • Slight product differentiation

  15. Long run equilibrium of the firm Rs LRAC P1 DLunder perfect competition O Q1 Q

  16. Long run equilibrium of the firm perfect andmonopolistic competition Rs LRAC P2 P1 DLunder perfect competition DLunder monopolistic competition O Q2 Q1 Q

  17. Identifying Monopolistic Competition • Two indexes: • The four-firm concentration ratio • The Herfindahl-Hirschman Index

  18. The four-firm concentration ratio • The percentage of the value of sales accounted for by the four largest firms in the industry. • The range of concentration ratio is from almost zero for perfect competition to 100 percent for monopoly. • A ratio that exceeds 40 percent: indication of oligopoly. • A ratio of less than 40 percent: indication of monopolistic competition.

  19. The Herfindahl-Hirschman Index (HHI)‏ • The square of the percentage market share of each firm summed over the largest 50 firms in a market. • Example, four firms with market shares as 50 percent, 25 percent, 15 percent, and 10 percent. • HHI = 502 + 252 + 152 + 102 = 3,450 • A market with an HHI less than 1,000 is regarded as competitive. • An HHI between 1,000 and 1,800 is moderately competitive.

  20. Limitations of Concentration Measures • The two main limitations of concentration measures alone as determinants of market structure are their failure to take proper account of • The geographical scope of a market • Barriers to entry and firm turnover

  21. Thank you…………………..

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