Monopolistic Competition

Monopolistic Competition (m.c.) u u large number of independent sellers u u no or low barriers to entry u u differentiated product

differentiated products products that are distinguished from similar products by such characteristics as quality, design, and location. examples: service stations, aspirin, tissues, retail stores

Demand Curve for the Monopolistic Competitor’s Product Since the product is differentiated, there is some brand loyalty and the firm has some control over price. Since there are good substitutes available, however, the demand curve is fairly elastic.

The demand curve for the monopolistic competitor’s product is flatter than the demand curve for the monopolist’s product, but not horizontal like the demand curve for the perfect competitor’s product. p.c. m.c. monopoly D DD PP P QQQ

Apart from the fact that the demand curve for the monopolistic competitor’s product is technically flatter than the demand curve for the monopolist’s product, the graphs look essentially the same.

Monopolistic Competitor making positive economic profits

Profit-maximizing output: where MR = MC ATC MC MRD $ quantityQ*

Determine the price from the demand curve, above Q*. ATC MC MRD quantity $ Q* P*

Determine the cost per unit from the ATC curve, above Q*. ATC MC MRD quantity $ Q* P* ATC*

Determine the TR = PQ box. ATC MC MRD quantity $ Q* P* ATC*

Determine the TC = ATC. Q box. ATC MC MRD quantity $ Q* P* ATC*

The difference between TR and TC is profit. ATC MC MRD quantity $ Q* P* ATC* profit

Monopolistic Competitor with a loss

Profit-maximizing or loss-minimizing output: where MR = MC ATC MC MRD $ quantityQ* AVC

Determine the price from the demand curve, above Q* ATC MC MRD $ quantityQ* P* AVC

Determine the cost per unit from the ATC curve, above Q* ATC MC MRD $ quantityQ* ATC* P* AVC

Determine the TC = ATC. Q box ATC MC MRD $ quantityQ* ATC* P* AVC

Determine the TR = PQ box. ATC MC MRD $ quantityQ* ATC* P* AVC

The difference between TR and TC is profit or loss. ATC MC MRD $ quantityQ* ATC* P* loss AVC

Monopolistic Competitor Breaking Even (Zero Economic Profit)

Profit-maximizing output: where MR = MC (directly below the tangency of D and ATC) ATC MC MRD $ quantityQ*

Determine the price from the demand curve, above Q* ATC MC MRD $ quantityQ* P*

Determine the cost per unit from the ATC curve, above Q* ATC MC MRD $ quantityQ* ATC* = P*

Determine the TR = PQ box. ATC MC MRD $ quantityQ* ATC* = P*

Determine the TC = ATC. Q box. ATC MC MRD $ quantityQ* ATC* = P*

Since TR = TC, profit is zero. ATC MC MRD $ quantityQ* ATC* = P*

Possibilities for the Monopolistic Competitor short run: positive profits, losses, or breaking even. long run: breaking even.

Similarities between perfect competition and monopolistic competition u u Profits must be zero in long run equilibrium. u u Firms are responsive to changes in demand conditions. u u Competition in the pursuit of profit encourages resource movements that are efficient.

Differences between perfect competition and monopolistic competition u u In long run equilibrium, the perfectly competitive firm is at the minimum of the ATC curve. The monopolistically competitive firm is not. u u For perfectly competitive firms, P = MC. For monopolistically competitive firms, P > MC. u u Perfectly competitive firms don’t advertise because everyone knows the products are all the same. Monopolistic competitors advertise to convince consumers that their product is better than others.

Price Discrimination when a seller charges different prices to different consumers for the same product or service.

Examples Charging different prices for movie admission to students and senior citizens and to other customers is price discrimination. Charging different prices for movie admission on a Wednesday afternoon and on a Saturday night is not price discrimination because the products are not the same.

Requirements for Price Discrimination to Occur u u Firm must have some control over price. (So perfect competitors can not price discriminate, but monopolistic competitors, monopolists, and oligopolists can.) u u Firm must be able to separate consumers into different identifiable groups. u u The different groups must have different elasticities.

The price discriminating firm charges the group with the higher elasticity a lower price.