MONOPOLISTIC

COMPETITION
SOLIDANIO, ANDRADE, VERMONT
Vermont
 MARKET STRUCTURE

FLOWCHART THAT
SHOWS MARKET
PERFECT IMPERFECT
MONOPOLY
COMPETITION COMPETITION STRUCTURE

MONOPOLISTIC
OLIGOPOLY
COMPETITION
 MARKET STRUCTURE

PERFECT MONOPOLY IMPERFECT

Presentations are
COMPETITON COMPETITON
Presentations are A market structure
tools used for

many firms, identical

tools used for
characterized by a single
reports, speeches
OLIGOPOLY: only a few
products
reports, speeches
seller, selling a unique
and more. sellers offer similar or
product in the market. identical products.
and more.
The product offered by all sellers
is the same in all respect so no In a monopoly market,
firm can increase its price and if a the seller faces no Monopolistic
firm tries to increase the price competition, as he is the competiton: many firms
then it will lose its all demand to
sole seller of goods with sell similar products but
the competitors.
no close substitute. not identical products
CHARACTERISTICS OF
MONOPOLISTIC
COMPETITION
many sellers

product and differentiation

free entry and exit

COMPARING PERFECT COMPARING MONOPOLY
AND MONOPOLY AND MONOPOLY
COMPETITION COMPETITION
SOLIDANIO
 LONG RUN: in monopolistic
SHORT RUN: under monopolistic
competition, entry and exit drive
competition, firm behavior is very
economic profit to zero.
similar to monopoly.
If profits in the short run:
New firms enter market,
taking some demand away from existing
firms,
prices and profits fall.
If losses in the short run:
Some firms exit the market,
remaining firms enjoy higher demand and
prices.
Excess capacity MARKUP OVER MARGINAL COST:
The monopolistic competitor  nder monopolistic competition,
operates on the downward-sloping P>MC
part of its ATC curve,  produces
less than the cost-minimizing under perfect competition, P=MC 
output.
Under perfect competition, firms
produce the quantity that
minimizes ATC
MONOPOLISTIC
COMPETITION
Monopolistically competitive markets do not

have all the desirable welfare properties of perfectly competitive

AND WELFARE
markets.

Firms earn zero profits, so cannot require them

to reduce prices.
MONOPOLISTIC
COMPETITION
AND WELFARE
ANDRADE
 ADVERTISING

In monopolistically competitive
industries, product differentiation and
markup pricing lead naturally to the
use of advertising.
The more differentiated the products,
the more advertising firms buy.
 CRITIQUE OF ADVERTISING

Society is wasting the resources it devotes to advertising.

Firms advertise to manipulate people’s tastes
Advertising impedes competition –  it creates the perception that products are
more differentiated than they really are, allowing higher markups.
Defenders of advertising believe:
It provides useful information to buyers.
Informed buyers can more easily find and exploit price
differences.
Thus,advertising promotes competition and reduces market
power.

DEFENSE OF ADVERTISING
ADVERTISING AS
A SIGNAL OF
QUALITY
 BRAND NAMES

In many markets, brand name

products coexist with generic ones.
Firms with brand names usually spend
more on advertising, charge higher
prices for the products.
 CRITIQUE OF BRAND NAMES

Brand names cause consumers to perceive differences that do not really exist.
Consumers’ willingness to pay more for brand names is irrational, fostered by
advertising.
Eliminating govt protection of trademarks would reduce influence of brand
names, result in lower prices.
Brand names provide information about quality to
consumers
Companieswith brand names have incentive to maintain
quality, to protect the reputation of their brand names.

DEFENSE OF BRAND NAMES