Monopolistically Competitive Industries Microeconomics All text in these slides is taken from https://courses.lumenlearning.com/waymakermacromicro-fall2016/ where it is published under one or more open licenses. All images in these slides are attributed in the notes of the slide on which they appear and licensed as indicated. Cover Image: Untitled Author: Radek Grzybows  Located at: https://unsplash.com/photos/8tem2WpFPhM License: Creative Commons Zero What is Marketing? Principles of Marketing

Monopolistic Competition Monopolistically competitive markets feature a large number of competing firms, but the products that they sell are not identical Most of the markets that consumers encounter at the retail level are monopolistically competitive (Credit: modification of work by Pixel Drip/Flickr Creative Commons)

Differentiated Products A firm can try to make its products different from those of its competitors in several ways: physical aspects of the product location from which the product is sold intangible aspects of the product perceptions of the product

Perceived Demand for Firms in Different Competitive Settings Principles of Microeconomics Chapter 10.2. Authored by: OpenStax College. Located at: http://cnx.org/contents/ea2f225e-6063-41ca-bcd8-36482e15ef65@10.31:24/Microeconomics. License: CC BY: Attribution. License Terms: Download for free at http://cnx.org/content/col11627/latest

How a Monopolistic Competitor Chooses its Profit Maximizing Output and Price Principles of Microeconomics Chapter 10.2. Authored by: OpenStax College. Located at: http://cnx.org/contents/ea2f225e-6063-41ca-bcd8-36482e15ef65@10.31:24/Microeconomics. License: CC BY: Attribution. License Terms: Download for free at http://cnx.org/content/col11627/latest

Monopolistic Competition, Entry, and Exit Principles of Microeconomics Chapter 10.2. Authored by: OpenStax College. Located at: http://cnx.org/contents/ea2f225e-6063-41ca-bcd8-36482e15ef65@10.31:24/Microeconomics. License: CC BY: Attribution. License Terms: Download for free at http://cnx.org/content/col11627/latest

Advertising in Monopolistic Competition In the framework of monopolistic competition, there are two ways to conceive of how advertising works: It causes a firm’s perceived demand curve to become more inelastic (that is, it causes the perceived demand curve to become steeper) It causes demand for the firm’s product to increase (that is, it causes the firm’s perceived demand curve to shift to the right)

Efficiency in Monopolistic Competition The end result of entry and exit is that firms end up with a price that lies on the downward-sloping portion of the average cost curve, not at the very bottom of the AC curve Thus, a monopolistically competitive industry will produce a lower quantity of a good and charge a higher price for it than would a perfectly competitive industry Thus, monopolistic competition will not be productively or allocatively efficient

Is Differentiation Valuable to Society? Yes No based on variety and innovation People don’t have to buy brand names firms are struggling to figure out ways of attracting customers by methods like friendlier service, free delivery, guarantees of quality, variations on existing products, and a better shopping experience Socially wasteful because people would be just as happy with lower prices and fewer options Advertising and marketing don’t produce value

Practice Question Why do you choose the brands you do in monopolistically competitive markets? Would you prefer a more efficient market with lower prices and fewer choices?

Quick Review What are the characteristics of a monopolistically competitive industry? How do economists calculate and graph the firm’s fixed, variable, average, marginal and total costs? What is the difference between short run and long run equilibrium in a monopolistically competitive industry? How does product differentiation works in monopolistically competitive industries? How do firms use advertising to differentiate their products? How does differentiation impact elasticity? Why are monopolistically competitive markets inefficient?