1. The Theory of the Firm Monopolistic Competition
Profit maximization in short & long runs
Non-price competition
Efficiencies
Comparison to other theories
Most info from Blink & Dorton or Tragakes

2. RECAP: What would CR1= 100% be?
A monopoly!
What would CR4 = 0% be?
Perfect competition
(or perhaps monopolistic competition)

3. RECAP: Intro to Monopolistic Competition
Supposed to be more realistic (between 2 extremes of monopoly/perfect competition)
Key Characteristics
Fairly large # of (small) firms
No barriers to entry
Free to enter and leave whenever
Substantial control over market price
If a firm raises price, doesn’t lose all sales (perfect c.) but loses more sales than the monopolist
Slightly differentiated products
Physical, quality, location, services, advertising differences
Which are similar to perfect competition?

4. What is monopolistic about monopolistic competition?
Firms have some ability to set price.

5. RECAP: Intro to Monopolistic Competition
Examples
Apparel
Detergent
Publishing
Furniture
Italian restaurants
Mechanics
Jewelers

6. RECAP: How is Monopolistic Competition different to Perfect Competition ?
The most significant difference from perfect competition, is that in monopolistic competition, there is product differentiation.
As the products are differentiated there will some extent of brand loyalty.
Could the person who sells dumplings on the street have a “brand?”
Sure! (Brands don’t have to be official…this seller’s “brand” could be great food & friendly service)

7. B/c of this loyalty:
People can set their own prices (“price makers”), leading to a ________ sloping demand curve
NEGATIVELY
BUT…It will still mostly be an elastic curve b/c there are many substitutes available!

8. Recap: UNDERSTANDING TOTAL REVENUE
Is this what happens if price is constant?
(Note: This is when firms have no control over the price)
What happens if price is variable?
(Note: This is when firms have control over the price)

9. How different are these compared to monopolies?
Same in short run, but different in long run
WHY???
ONLY NORMAL PROFITS HAPPEN IN LONG RUN B/C NO BARRIERS TO ENTRY (ANYONE CAN GET IN/OUT)
Abnormal profits attract new entrants, losses get firms to leave

10. Long Run Equilibrium in Monopolistic Competition
Why does this graph show normal profit?
Why does monopolistic competition have only normal profit in the long run?
What about this graph makes it monopolistic competition? (instead of perfect comp.)
Why is Q the profit-maximizing point?

11. Monopolistic Competition vs. Perfect Competition IN THE LONG RUN
ONLY PROFIT MAXIMIZATION
PROFIT MAXIMIZATION
PRODUCTIVELY EFFICIENT
ALLOCATIVELY EFFICIENT

12. Long Run Equilibrium in Monopolistic Competition
DOES EITHER PRODUCTIVE OR ALLOCATIVE EFFICIENCY OCCUR WHEN PROFIT IS MAXIMIZED IN THE LONG RUN IN MONOPOLISTIC COMPETITION?
Does either MC = AR (allocative efficiency) OR MC = AC (productive efficiency) occur at the profit-maximizing point (where MR = MC)
No!
DO MONOPOLISTIC COMPETITORS AN EFFICIENT LEVEL?
No! (But they do maximize profits where MC = MR)

13. MONOPOLISTIC COMPETITION
What are the causes of the inefficiencies in monopolistic competition & a monopoly?
MONOPOLISTIC COMPETITION
MONOPOLY
B/C consumers desire variety and are willing to pay different prices
Which is better?
Allocative inefficiency but differentiated products (monopolistic competition) OR
Allocative efficiency but homogenous products (perfect competition)
B/C firm has ability to restrict output & increase price as in a monopoly

14. Types of monopolistic competition
PRICE COMPETITION
NON-PRICE COMPETITION
Rivalry between producers based solely on price, usually when selling identical or extremely similar products
Examples?
Competition between producers based on all except the price by focusing on product differentiation.
Examples?
Advertising
Packaging
Product Development/Quality
Quality/Amount of Service

15. RESTUARANT EXAMPLE OF MONOPOLISTIC COMEPTITION

16. RECAP: COMPETITION THEORIES