Download Monopolistic Competition

Monopolistic
Competition
Monopolistic Competition
• Characteristics:
• Relatively large number of firms: there are maybe dozens, each
with a fairly small share of the total market
• Easy entry and exit: few barriers to entry, the largest is providing
sufficient marketing the differentiate a new firms product from
existing rivals
Monopolistic Competition
• Characteristics Cont’d
• Differentiated products: strive for as
much product differentiation as possible,
because the more differentiated the more
power they have to set price
Monopolistic Competition
• Real World Examples
• Market for shoes
• Book publishing companies
• Jean market
Monopolistic Competition
• Key to this industry is to differentiate products and keep
market share high
• How do they keep market share high?
• Advertising
• Goal is “non price competition” makes price less of a factor in
consumer purchases and make product differences a greater factor
• Brand loyalty
• How do they differentiate products?
• Quality
• Identity
• Unique designs
Monopolistic Competition
• Short Run Profit Maximization
• Profit Maximization where MR = MC
• Act like monopoly – set their prices and quantity
• Short Run positive profits
• P > ATC
Monopolistic Competition
• Long Run
• With easy entry and exit short run positive profits cause
firms to enter industry
• Firms entering causes market share of existing firms to
decrease
• Individual firm demand decreases
• Profits falls until P = ATC
• Long Run profit is ZERO!
Monopolistic Competition
• Productive Efficiency
• Does not produce at lowest ATC
• NOT productively efficient
• Allocative Efficiency
• Operates like a monopoly
• Supply does not equal demand
• NOT allocatively efficient