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Monopolistic Competition (for Students)

Monopolistic Competition (for Students)

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Published by: adillawa on Mar 17, 2010
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Monopolistic Competition

MONOPOLISTIC COMPETITION
‡ Aims of lecture
± To identify the meaning of monopolistic competition and distinguish it from other market structures ± To demonstrate the profit-maximising price, output and profit for a firm under monopolistic competition in: a) the short run b) the long run ± To examine the social implications of monopolistic competition

MONOPOLISTIC COMPETITION
‡ Market structures
a) Perfect competition b) Monopolistic competition c) Oligopoly d) Monopoly

MONOPOLISTIC COMPETITION
‡ Imperfect competition
± Two definitions
‡ Any industry where firms are not price takers
± This includes pure monopoly

‡ Any industry where firms are not price takers but face competition from other firms
± This excludes pure monopoly

± Monopolistic competition
‡ Free entry

± Oligopoly
‡ Restricted entry

Features of the four market structures
Type f r et er f fir reedom of entry Nat re of product amples Implications for demand curve faced y firm Horizontal: firm is a price taker Downward sloping, but relatively elastic Downward sloping. Relatively inelastic (shape depends on reactions of rivals) Downward sloping: more inelastic than oligopoly. Firm has considerable control over price

Perfect competition onopolistic competition

Very many M any / several

Unrestricted

Homogeneous (undifferentiated)

abbages, carrots (approximately) Builders, restaurants Cement cars, electrical appliances Local water company, train operators (over particular routes)

Unrestricted

Differentiated

Undifferentiated Oligopoly Few Restricted or differentiated

M onopoly

One

Restricted or completely blocked

Unique

Small and Medium Sized Enterprises (SMEs)

No. of firms

Employment
SMEs under 250 employees Large enterprises 250+ employees

Turno er

Source: SME Statistics UK, DTI

MONOPOLISTIC COMPETITION
‡ Assumptions of monopolistic competition
± Large number of firms ± Freedom of entry ± Differentiated products
‡ Downward-sloping demand cur e ‡ Each firm has some power o er prices

‡ E uilibrium of the firm
± short run
MR = MC

Short-run e uilibrium of the firm under monopolistic competition
£

MC AC

AR ! D MR
O Q

MONOPOLISTIC COMPETITION
‡ E uilibrium of the firm
± long run
‡ If economic (supernormal) profits are made, new firms will be attracted into the industry ‡ Long-run e uilibrium where MR = MC (profit maximisation) AR = AC (no economic profits just normal profit)

Long-run e uilibrium of the firm under monopolistic competition
£

LRMC LRAC ARS ! DS

MRS
O Q

MONOPOLISTIC COMPETITION
‡ Assumptions of monopolistic competition ‡ E uilibrium of the firm
± short run
MR = MC

± long run
MR = MC; AR = AC

± under-utilisation of capacity in long run

Under-utilisation of capacity in the long run
£

LRAC

DL under monopolistic
competition

O

Q

MONOPOLISTIC COMPETITION
‡ The public interest
± comparison with perfect competition

Long run e uilibrium of the firm under perfect and monopolistic competition
£

‡ Production not at minimum AC ‡ Price not e ual to MC ‡ Costs of product differentiation

LRAC

P1

DL under monopolistic
competition

O

Q1

Q

MONOPOLISTIC COMPETITION
‡ E-Commerce a case study
± Low entry costs
‡ reduced capital and marketing costs ‡ outsourcing

± Near perfect knowledge
‡ greater price transparency ‡ greater information on product a ailability

± Reduction in firms¶ power o er prices
‡ greater competition (often global) ‡ ease for consumers to µshop around¶ ‡ firms more flexible in sourcing their supplies

MONOPOLISTIC COMPETITION
‡ E-Commerce a case study (cont.)
± Constant stri ing by firms to reduce competition
‡ firms seeking to differentiate their product µrent seeking¶ ‡ mergers and ac uisitions ‡ first-mo er ad antage

MONOPOLISTIC COMPETITION
‡ The public interest
± comparison with perfect competition ± comparison with monopoly
‡ no long-term economic profits
± possibly lower price ± BUT lack of economies of scale and less to plough back into in estment

‡ choice for consumer
± competition may impro e uality and/or reduce costs

MONOPOLISTIC COMPETITION
‡ Limitations of the model
± imperfect information ± difficulty in identifying industry demand cur e ± entry may not be totally free ± Indi isibilities may allow economic profits e en in long run ± importance of non-price competition

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