Presentation on theme: "Managerial Economics & Business Strategy"— Presentation transcript:
1 Managerial Economics & Business Strategy Chapter 8Managing in Competitive, Monopolistic, and Monopolistically Competitive Markets
2 Managing a Monopolistically Competitive Firm Like a monopoly, monopolistically competitive firmshave 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 Monopolist TRUnit elastic100ElasticUnit elastic601200Inelastic40208001020304050Q1020304050QMRElasticInelastic
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 monopolistProduce output where MR = MC.Charge the price on the demand curve that corresponds to that quantity.
6 Three cases (graphically) with Monopolistic ProfitPrice > ATCBreak-even (Zero Economic Profit, Normal Profit)Price = ATCLoss and continue to operateATC > Price
7 Short-Run Monopolistic Competition MC$ATCProfitPMATCDQuantity of Brand XQMMR
8 Long Run Adjustments?If the industry is truly monopolistically competitive, there is free entry.In this case other “greedy capitalists” enter, and their new brands steal market share.This reduces the demand for your product until profits are ultimately zero.
9 Long-Run Monopolistic Competition Long Run Equilibrium(P = AC, so zero profits)$ACMCP*P1EntryDMRD1Q1Q*Quantity of Brand XMR1
10 Monopolistic Competition The Good (To Consumers)Product VarietyThe Bad (To Society)P > MCExcess capacityUnexploited economies of scaleThe Ugly (To Managers)P = ATC > minimum of average costs.Zero Profits (in the long run)!