This slideshow was written by Ken Chapman, but is substantially based on concepts from Modern Industrial Organization by Carlton and Perloff, 4 th edition, McGraw-Hill. Monopolistic Competition  Market Power, but zero profit in the long run  Differentiated products: Representative Consumer Models  People have a taste for variety Location Models  Different people want different things Effect on Demand  Inverse demand: P i= D(q 1, q 2,…, q n )=100-2q 1 -3 q 2 Linear Example: n=2

Representative Consumer, Undifferentiated Products This slideshow was written by Ken Chapman, but is substantially based on concepts from Modern Industrial Organization by Carlton and Perloff, 4 th edition, McGraw-Hill. Cournot Example: Answer from Ch. 6:

Representative Consumer, Undifferentiated Products: Figure 7.1 This slideshow was written by Ken Chapman, but is substantially based on concepts from Modern Industrial Organization by Carlton and Perloff, 4 th edition, McGraw-Hill. MC Output Cents 36 AC Monopolistically Competitive Equilibrium

Representative Consumer, Undifferentiated Products  Summary What happens as F increases?  To price?  To the number of firms?  To profit?  To Total Surplus (Welfare)? Suppose products are differentiated  What happens to demand?  What happens to Welfare?  Is there sufficient product variety? This slideshow was written by Ken Chapman, but is substantially based on concepts from Modern Industrial Organization by Carlton and Perloff, 4 th edition, McGraw-Hill.

Figure 7.3 Quantity, q $ $ AC Demand AC Demand C B R D E CS

This slideshow was written by Ken Chapman, but is substantially based on concepts from Modern Industrial Organization by Carlton and Perloff, 4 th edition, McGraw-Hill. Location Model  Hotelling: Fixed Prices 0 1

This slideshow was written by Ken Chapman, but is substantially based on concepts from Modern Industrial Organization by Carlton and Perloff, 4 th edition, McGraw-Hill. Bertrand Competition: Linear Town PAPA PBPB x 100 people live in town

This slideshow was written by Ken Chapman, but is substantially based on concepts from Modern Industrial Organization by Carlton and Perloff, 4 th edition, McGraw-Hill. Finding Demand

This slideshow was written by Ken Chapman, but is substantially based on concepts from Modern Industrial Organization by Carlton and Perloff, 4 th edition, McGraw-Hill. Finding The Reaction Functions

This slideshow was written by Ken Chapman, but is substantially based on concepts from Modern Industrial Organization by Carlton and Perloff, 4 th edition, McGraw-Hill. Bertrand Equilibrium

This slideshow was written by Ken Chapman, but is substantially based on concepts from Modern Industrial Organization by Carlton and Perloff, 4 th edition, McGraw-Hill. What is the Bertrand/Nash Equilibrium?

This slideshow was written by Ken Chapman, but is substantially based on concepts from Modern Industrial Organization by Carlton and Perloff, 4 th edition, McGraw-Hill. Conclusions?  Principle of Maximum differentiation  Complications: Be where the demand is Positive externalities between firms Price regulation

This slideshow was written by Ken Chapman, but is substantially based on concepts from Modern Industrial Organization by Carlton and Perloff, 4 th edition, McGraw-Hill. RTE Breakfast Cereals  1972 FTC charge against the 4 largest RTE Breakfast serial manufacturers that brand proliferation was used to prevent entry : 6 leading producers introduced 80 brands and had 95% of all cereal sales Didn’t enter the natural cereals market, and many companies moved into that market Niche.