MONOPOLISTICS

MARKET
Dr. Tinneke Hermina., S.T., M.Si
 WHAT IS
MONOPOLISTICS?
Monopolistic competition involves
many firms competing against each
other, but selling products that are
distinctive in some way.

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 WHAT IS
MONOPOLISTICS?
Examples include stores that sell
different styles of clothing; restaurants
or grocery stores that sell different
kinds of food; and even products like
golf balls or tea that may be at least
somewhat similar but differ in public
perception because of advertising and
brand names.

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 MONOPOLISTICS
Monopolistic competition is a model
characterized by many firms
producing similar but differentiated
products in a market with easy entry
and exit. The firms in monopolistic
competition are price setters or
makers, rather than price takers.

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 DIFFERENTIATED
PRODUCT
A firm can try to make its products
different from those of its competitors
in several ways: physical aspects of the
product, selling location, intangible
aspects of the product, and
perceptions of the product. Products
that are distinctive in one of these four
ways are called differentiated
products.

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 PERCEIVED DEMAND
FOR A MONOPOLISTIC
COMPETITOR
The demand curve as faced by a
monopolistic competitor is not flat,
but rather downward-sloping,
meaning that the monopolistic
competitor, like the monopoly, can
raise its price without losing all of its
customers or lower its price and gain
more customers.

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 PERCEIVED DEMAND FOR
A MONOPOLISTIC
COMPETITOR
The demand curve as faced by a
monopolistic competitor is not flat, but
rather downward-sloping, meaning that the
monopolistic competitor, like the monopoly,
can raise its price without losing all of its
customers or lower its price and gain more
customers.

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 PERCEIVED DEMAND
FOR A MONOPOLISTIC
COMPETITOR
When a monopolistic competitor
raises its price, consumers can choose
to buy a similar product from another
firm. If a monopolistic competitor
raises its price, it will not lose as many
customers as would a perfectly
competitive firm, but it will lose more
customers than a monopoly would.

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 HOW A MONOPOLISTIC
COMPETITOR CHOOSES
PRICE AND QUANTITY
The monopolistically competitive firm
decides on its profit-maximizing
quantity and price similar to the way
that a monopolist does. Since they
face a downward sloping demand
curve, the same considerations about
how elasticity affects revenue are
relevant, and the firm will maximize
profits where MR = MC 

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 HOW A MONOPOLISTIC
COMPETITOR CHOOSES
PRICE AND QUANTITY
Step1 : The company determines its profit-
maximizing level of output. This will occur where
MR = MC. Two situations are possible:
• If the firm is producing at a quantity of output
where marginal revenue exceeds marginal cost,
then the firm should keep expanding
production, because each marginal unit is
adding to profit by bringing in more revenue
than cost. In this way, the firm will produce up
to the quantity where MR = MC.
• If the firm is producing at a quantity where
marginal costs exceed marginal revenue, then
each marginal unit is costing more than the
revenue it brings in, and the firm will increase
its profits by reducing the quantity of output 10

until MR = MC.
 THE BENEFITS OF VARIETY
AND PRODUCT
DIFFERENTIATION
Step 2 : The company decides what price to
charge. When the firm has determined its
profit-maximizing quantity of output, it will
behave like a monopoly and charge the
maximum it can at the quantity.

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 THE BENEFITS OF VARIETY
AND PRODUCT
DIFFERENTIATION
• First, although both a monopolist and a
monopolistic competitor face downward-
sloping demand curves, the monopolist’s
demand curve is the market demand
curve, while the perceived demand
curve for a monopolistic competitor is
based on the extent of its product
differentiation and how many competitors
it faces.
• Second, a monopolist is surrounded by
barriers to entry and need not fear entry,
but a monopolistic competitor who earns
profits must expect the entry of firms with
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similar, but differentiated, products.
 PROFIT OR LOST?

P > ATC P = ATC

THE FIRM EARNING PROFIT THE BUSINESS IS EARNING ZERO
ECONOMIC PROFIT

P < ATC
THE COMPANY IS MAKING LOSS

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MARKET POWER OF MONOPOLISTICS
• Product differentiation
• Branding
• Advertising
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