1. Monopolistic Competition and Oligopoly
Chapter 11

2. Introduction Market structure is the focus real-world competition.
Market structure refers to the physical characteristics of the market within which firms interact.
How do firms and people buy and sell?

3. Introduction
Market structure involves the number of firms in the market and the barriers to entry.

4. Introduction
Perfect competition, with an infinite number of firms, and monopoly, with a single firm, are polar opposites.
Monopolistic competition lie between these two extremes.
Keiretsu – business network

5. Introduction
Monopolistic competition is a market structure in which there are many firms selling differentiated products.
There are few barriers to entry.

6. 11.1 Characteristics of Monopolistic Competition
Four distinguishing characteristics:
Many sellers that do not take into account rivals’ reactions – each firm has a small share of the market
Lack of Collusion with so many firms it’s hard to get together and collude
Independence because of so many firms, each one acts independently. No firm takes into account the actions of other firms. 6

7. Product Differentiation
Product differentiation implies that the products are different enough that the producing firms exercise a “mini-monopoly” over their product.
The firms compete more on product differentiation than on price.
Entering firms produce close substitutes, not an identical or standardized product.

8. Single Monopolistically Competitive Firm
Short Run and Long Run in Monopolistic Competition
Single Monoply Firm
Single Monopolistically Competitive Firm P
Profit P MC MC MR
D,P MR
D = P A Pm
P = ATC
MCM
ATC A
ATC QM QM Q Q

9. 11.2 Short-Run, Output, Price, and Profit of a Monopolistic Competitor
Like a monopoly,
The monopolistic competitive firm has some monopoly power so the firm faces a downward sloping demand curve
Marginal revenue is below price
At profit maximizing output, marginal cost will be less than price
Like a perfect competitor, zero economic profits exist in the long run 9

10. A Monopolistically Competitive Firm: Above Normal Profit

11. A Monopolistically Competitive Firm: Economic Loss

12. A Monopolistically Competitive Firm: Normal Profit

13. Entry and Normal Profit

14. Comparing Perfect and Monopolistic Competition
Both the monopolistic competitor and the perfect competitor make zero economic profit in the long run.

15. 11.3 Long-Run Equilibrium in Monopolistic Long Run
It is possible for the monopolist to make economic profit in the long-run.
No long-run economic profit is possible in monopolistic competition due to easy entry and differentiated products.

16. Perfect Competition and Monopolistic Competition Compared

17. Monopolistic Competition Compared with Perfect Competition GraphMC
In monopolistic competition in the long run, P > ATCmin
In perfect competition in the long run, P = ATCmin
ATC
PMC
DPC
PPC
Outcome:
Monopolistic competition output is lower and
price is higher than
perfect competition
DMC
MRMC Q
QMC
QPC 17

18. Monopolistic Competition Compared with Perfect Competition GraphMC
In monopolistic competition in the long run, P > min ATC,
ATC
PMC
DPC
PPC
Outcome:
Monopolistic competition output is lower (excess capacity) and
price is higher than
perfect competition
DMC
MRMC Q
QMC
QPC 18