Monopolistic Competition Microeconomics

TPS  Write down a list of restaurants which serve basically the same food. Monopolistic Competition

Defining Monopolistic Competition  Somewhere between  Perfect competition and an Oligopoly  Many firms but NOT as many as PC  Differentiated product  Each firm has some ability to set the price of their product.  No barriers to entry and exit.  Inefficient market

Monopolistic Competition in the Short Run  Short-run economic profit encourages firms to enter the market  TT = MR = MC at Q  P = intersection of Q and MR = MC  Positive economics profit is P > ATC

Monopolistic Competition in the Short Run Quantity 0 Price Profit- maximizing quantity Price Demand MR ATC Firm Makes Profit Average total cost Profit MC

Monopolistic Competition in the Short Run  Short-run economic losses encourage firms to exit the market.  Negative economics losses is P < ATC

Monopolistic Competitors in the Short Run Demand Quantity 0 Price Loss- minimizing quantity Average total cost Firm Makes Losses MR Losses ATC MC

Homework  Multiple Choice – 1, 2, 3, 5, 6, 7  Short Answer - 21

Monopolistic Competition in Long-Run Equilibrium  Firms will enter and exit until the firms are making exactly zero economic profits.

Monopolistic Competitor in the Long Run Quantity Price 0 Demand MR ATC MC Profit-maximizing quantity P =ATC The demand curve is tangent to the ATC curve. And this tangency lies vertically above the intersection of MR and MC.

Monopolistic Competition versus Perfect Competition  Two differences  Excess capacity  Markup over marginal cost

Monopolistic versus Perfect Competition  Excess Capacity is …  Firms produce less than the output at which ATC is minimized

Monopolistic Competition versus Perfect Competition Quantity 0 Price Demand Monopolistically Competitive Firm Quantity 0 Price P=MCP=MR (demand curve) Perfectly Competitive Firm MC ATC MC ATC MR Efficient scale P Quantity produced Quantity produced = Efficient scale

Monopolistic Competition versus Perfect Competition  Markup over Marginal Cost  Markup = P - MC  More profit is generated

Monopolistic Competition versus Perfect Competition Quantity 0 Price Demand Monopolistically Competitive Firm Quantity 0 Price P=MCP=MR (demand curve) Perfectly Competitive Firm Markup MC ATC MC ATC MR Marginal cost P Quantity produced Quantity produced

Monopolistic Competition versus Perfect Competition Quantity 0 Price Demand Monopolistically Competitive Firm Quantity 0 Price P=MCP=MR (demand curve) Perfectly Competitive Firm Markup Excess capacity MC ATC MC ATC MR Marginal cost Efficient scale P Quantity produced Quantity produced = Efficient scale

Homework  Multiple Choice – 4, 8, 9, 10, 11, 12  Short Answer - 22

Product Differentiation  Differentiation by Style or Type  Think pizza!!  Deep-dish crust v. thin crust v. stuffed crust  Consumers have different tastes  Producers able to increase profits by differentiating their product.

Product Differentiation  Differentiation by Location  Nearer to you is better than farther away.  You may be willing to pay more when it’s closer/more convenient to/for you.

Product Differentiation  Differentiation by Quality  Mercedes v. Kia  Prices higher for Mercedes due to perceived/actual quality difference.

Advertising  Advertising delivers two different messages:  Information  persuasive

Advertising  Informative  Store hours  What we sell  Extra services

Advertising  Persuasive  ‘yummiest French fries’  ‘Just do it!’  ‘this house is charming and located in a lovely neighborhood.’  Use of humor, celebrities, special effects and/or musical jingles.

Brand Names  Brand Names are …  Owned by particular companies  Used to differentiate products in consumer’s minds  We think Kleenex for facial tissue. Many other brands of facial tissue.  Name brand v. store brand.  Ingredients essentially the same  Name brand cost more.

Homework  Multiple Choice –  Short Answer – 23, 24

Monopolistic Competition: Between Perfect Competition and Monopoly