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  • Monopolistic Competition: Submitted By: Faisal Mohd. Khan

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    Ayaan Khan
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    Monopolistic competition is an imperfect market structure with many small businesses that produce differentiated products. While firms have some control over prices, they face competition. In the short run, firms maximize profits where marginal revenue equals marginal cost. In the long run, new firms enter until firms earn only normal profits and average revenue equals average cost. While prices may be lower than monopoly, production is less efficient than perfect competition with underutilized capacity.

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    28501861 Monopolistic Competition for Students

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    Monopolistic competition is an imperfect market structure with many small businesses that produce differentiated products. While firms have some control over prices, they face competition. In the short run, firms maximize profits where marginal revenue equals marginal cost. In the long run, new firms enter until firms earn only normal profits and average revenue equals average cost. While prices may be lower than monopoly, production is less efficient than perfect competition with underutilized capacity.

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    Attribution Non-Commercial (BY-NC)
    Download as PPT, PDF, TXT or read online from Scribd
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    50 views14 pages

    Monopolistic Competition: Submitted By: Faisal Mohd. Khan

    Uploaded by

    Ayaan Khan
    Monopolistic competition is an imperfect market structure with many small businesses that produce differentiated products. While firms have some control over prices, they face competition. In the short run, firms maximize profits where marginal revenue equals marginal cost. In the long run, new firms enter until firms earn only normal profits and average revenue equals average cost. While prices may be lower than monopoly, production is less efficient than perfect competition with underutilized capacity.

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    Attribution Non-Commercial (BY-NC)
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    of 14

    Monopolistic

    Competition

    Submitted by: Faisal Mohd. Khan


    IM-2K8-26
    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
    MONOPOLISTIC COMPETITION

    • Assumptions of monopolistic competition


    – Large number of firms
    – Freedom of entry
    – Differentiated products
    • Downward-sloping demand curve
    • Each firm has some power over prices

    • Equilibrium of the firm


    – short run
    MR = MC
    Short-run equilibrium of the firm
    under monopolistic competition
    £ MC

    AC

    AR  D

    MR
    O Q
    MONOPOLISTIC COMPETITION

    • Equilibrium of the firm


    – long run
    • If economic (supernormal) profits are made, new
    firms will be attracted into the industry

    • Long-run equilibrium where:


    MR = MC (profit maximisation)
    AR = AC (no economic profits: just normal profit)
    Long-run equilibrium of the firm
    under monopolistic competition
    £

    LRMC

    LRAC

    ARS  DS

    MRS
    O Q
    MONOPOLISTIC COMPETITION

    • Assumptions of monopolistic competition

    • Equilibrium 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 equilibrium of the firm under perfect and
    monopolistic competition
    £
    • Production not at minimum AC
    • Price not equal 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 availability
    – Reduction in firms’ power over prices
    • greater competition (often global)
    • ease for consumers to ‘shop around’
    • firms more flexible in sourcing their supplies
    MONOPOLISTIC COMPETITION

    • E-Commerce: a case study (cont.)

    – Constant striving by firms to reduce


    competition
    • firms seeking to differentiate their product:
    ‘rent seeking’

    • mergers and acquisitions

    • first-mover advantage
    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 investment

    • choice for consumer


    – competition may improve quality and/or reduce costs
    MONOPOLISTIC COMPETITION

    • Limitations of the model


    – imperfect information

    – difficulty in identifying industry demand curve

    – entry may not be totally free

    – Indivisibilities: may allow economic profits


    even in long run

    – importance of non-price competition

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