Bài giảng topic 7(a) monopolisstic competition

Monopolistic Competition
Topic 7(a)
Contents
1. Characteristics of MC
2. Short run profit maximisation
3. Long run equilibrium
4. Assessment of MC
5. Product differentiation and Advertising
Characteristics of MC

Large number of small firms

so individual decisions have little or no
impact on other firms’ decisions

Differentiated products

similar but not identical

Low barriers to entry

low economies of scale

low set-up costs
Price and Output Determination
The Firm’s Demand Curve in MC is:

Highly elastic, Why?

More close substitutes than a pure monopolist


Not perfect substitutes (as is the case with
perfect competition)

Elasticity depends on

number of rivals

degree of product differentiation
Short-Run Price and Output
Determination
Rules for Profit maximization same as
under Perfect Competition

MR = MC (where MC cuts MR from below)

Short Run: P ≥ AVC

Long Run : P ≥ ATC
Economic
Profits
Short-Run Price and Output
Determination: Short-Run Profits
Q
D
P
Price and Costs
MR
MC
Q
AC

Losses
Q
D
P
Price and Costs
MR
MC
Q
ATC
Short-Run Price and Output
Determination: Short-Run Losses
Long Run

How much to produce?

MR = MC

Firms tend to break even, i.e. normal
profit

Tangency solution: profit-maximising firm will
produce an output when its demand curve is
at a tangent to its ATC curve

When ATC = Price

Long run Equilibrium
Long-Run Equilibrium

Why do monopolistically competitive firms

tend
to break even in the long run?

Profits attract new entrants

Losses encourage exits

Some complications

Some product differentiation

Some entry is partially restricted

Some economic losses may be tolerated by
firms in the long run
Assessment of MC (vs. PC)

Higher price, lower
output

lower consumer
surplus

like monopoly

P > MC

No allocative eff.

P = AC


like PC but

P ≠ min AC

No productive eff.
Monopolistic Competition &
Economic Efficiency

Productive inefficiency
: Minimum ATC
is not necessarily chosen

excess capacity

Allocative inefficiency
:

price does not necessarily equal MC

Good feature

product variety
Non-price Competition
(ie. competition not based on price)
Product differentiation:

Real and/or perceived differences created by factors such as:
quality, brands, service, location, advertising and packaging

Advantages

More choice

Innovation => Better products

Avoid price war

Disadvantages

Too much choice?

Superficial product changes – waste of resources
Non-price Competition -
Advertising
Firm
Advantages of Advertising

influences consumer preferences (the power of
persuasion)

makes demand more price inelastic

Increases market power, market share
Disadvantages of Advertising

Increases cost of production
Non-price Competition –
Advertising (cont.)
Society

Advantages of Advertising

Provides information

Promotes competition

Advertising revenue – cheaper media (television,
newspapers etc) for users
Disadvantages of Advertising

Misleading or false information

Waste of resources if overall market demand stays
constant

Creates barriers to entry (financial, brand loyalty)

Media bias towards advertisers