1. Managerial Economics & Business Strategy
Chapter 8
Managing in Competitive, Monopolistic, and Monopolistically Competitive Markets

2. Managing a Monopolistically Competitive Firm
Like a monopoly, monopolistically competitive firms
have market power that permits pricing above marginal cost.
level of sales depends on the price it sets.
But …
The presence of other brands in the market makes the demand for your brand more elastic than if you were a monopolist.
Free entry and exit impacts profitability.
Therefore, monopolistically competitive firms have limited market power.

3. Marginal Revenue Like a MonopolistTR
Unit elastic
100
Elastic
Unit elastic 60
1200
Inelastic 40 20
800 10 20 30 40 50 Q 10 20 30 40 50 Q MR
Elastic
Inelastic

4. Can we use the theory? Number 9
The CEO of a major automaker overheard one of its division managers make the following statement regarding the firm’s production plans: “In order to maximize profits, it is essential that we operate at the minimum point of our ATC curve”. If you were the CEO of the automaker, would you praise or chastise the manager?
Chastise the manager. Profit maximization requires producing where MR = MC.

5. Monopolistic Competition: Profit Maximization
Maximize profits like a monopolist
Produce output where MR = MC.
Charge the price on the demand curve that corresponds to that quantity.

6. Three cases (graphically) with Monopolistic
Profit
Price > ATC
Break-even (Zero Economic Profit, Normal Profit)
Price = ATC
Loss and continue to operate
ATC > Price

7. Short-Run Monopolistic CompetitionMC $
ATC
Profit PM
ATC D
Quantity of Brand X QM MR

8. Long Run Adjustments?
If the industry is truly monopolistically competitive, there is free entry.
In this case other “greedy capitalists” enter, and their new brands steal market share.
This reduces the demand for your product until profits are ultimately zero.

9. Long-Run Monopolistic Competition
Long Run Equilibrium
(P = AC, so zero profits) $ AC MC P* P1
Entry D MR D1 Q1 Q*
Quantity of Brand X
MR1

10. Monopolistic Competition
The Good (To Consumers)
Product Variety
The Bad (To Society)
P > MC
Excess capacity
Unexploited economies of scale
The Ugly (To Managers)
P = ATC > minimum of average costs.
Zero Profits (in the long run)!