1. Monopolistic Competition
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2. Characteristics of Monopolistic Competition:
Perfect
Competition
Monopolistic
Competition
Monopolistic
Competition
Pure
Monopoly
Pure
Monopoly
Oligopoly
Oligopoly
Characteristics of Monopolistic Competition:
Relatively Large Number of Sellers
Differentiated Products
Some control over price
Easy Entry and Exit (Low Barriers)
A lot of non-price competition (Advertising)
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3. Examples: Fast Food Restaurants Furniture companies Jewelry stores
Hair Salons
Clothing Manufacturers
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4. “Monopoly” + ”Competition”
Monopolistic Qualities
Control over price of own good due to differentiated product
D greater than MR
Plenty of Advertising
Not efficient
Perfect Competition Qualities
Large number of smaller firms
Relatively easy entry and exit
Zero Economic Profit in Long-Run since firms can enter/exit
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5. Differentiated Products5
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6. Differentiated Products
Goods are NOT identical.
Firms seek to capture a piece of the market by making unique goods.
Since these products have substitutes, firms use NON-PRICE Competition.
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7. Examples of NON-PRICE Competition
Brand Names and Packaging
Example?
Product Attributes
Service
Location
Advertising
Two Goals
1. Increase Demand
2. Make demand more INELASTIC

8. Monopolistic Competition
Firm’s demand curve
How does it compare to previous models?
Down-sloping and highly elastic (Why?)
Elasticity depends on number of rivals and degree of product differentiation
Short run profit or loss
How is profit maximized?
Produce where MR=MC
Long run profit/loss?
Normal profit
Easy entry and exit
Inefficient
11-8

9. Drawing Monopolistic Competition
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10. In the short-run, it is the same graph as a monopoly making profit
Monopolistic Competition is made up of prices makers so MR is less than Demand
In the short-run, it is the same graph as a monopoly making profit P MC
ATC P1
In the long-run, new firms will enter, driving down the DEMAND for firms already in the market. D MR Q Q1 10
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11. Why does DEMAND shift? When short-run profits are made…
New firms enter.
New firms mean more close substitutes and less market shares for each existing firm.
Demand for each firm falls.
When short-run losses are made…
Firms exit.
Result is less substitutes and more market shares for remaining firms.
Demand for each firm rises.
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12. Firms enter so demand falls until there is no economic profitMC
ATC P1 D MR Q Q1 12
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13. Firms enter so demand falls until there is no economic profit
Price and quantity falls and TR=TC P MC
ATC
PLR D MR Q
QLR 13

14. Quantity where MR =MC up to Price = ATC
LONG-RUN EQUILIBRIUM
Quantity where MR =MC up to Price = ATC P MC
ATC
PLR D MR Q
QLR 14

15. What happens when there is a loss?
In the short-run, the graph is the same as a monopoly making a loss
ATC P MC P1
In the long-run, firms will leave, driving up the DEMAND for firms already in the market. D MR Q Q1 15
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16. Firms leave so demand increases until there is no economic profit
ATC P MC P1 D MR Q Q1 16
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17. Firms leave so demand increases until there is no economic profit
Price and quantity increase and TR=TC
ATC P MC
PLR D MR
QLR Q 17
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18. Complications
A normal profit is the result in the theoretical model, but in the real world, variables can create variation from the model.
Stronger product differentiation may produce more monopolistic power and long-term economic profits
Air Jordan, anyone?
Barriers to entry may differ from industry to industry
Ex: Large scale shoe manufacturer vs. local cobbler

19. Extensions
What three options can a monopolistically competitive firm undertake to gain/sustain an economic profit?
1. Reduce costs
2. Increase demand (and costs?) for their product through differentiation
3. Increase demand (and costs) through advertising

20. Are Monopolistically Competitive Firms Efficient?
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21. Long- Run Equilibrium Not Allocatively Efficient because P  MC
Not Productively Efficient because not producing at Minimum ATC P
ATC MC
PLR D MR Q
QLR
QProd Efficient 21
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QSocially Optimal

22. This firm also has EXCESS CAPACITY
Long- Run Equilibrium
This firm also has EXCESS CAPACITY P
ATC MC
PLR D MR Q
QLR
QProd Efficient 22
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23. Excess Capacity
Given current resources, the firm can produce at the lowest costs (minimum ATC) but they decide not to.
The gap between the minimum ATC output and the profit maximizing output.
Not the amount underproduced
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24. Long- Run Equilibrium
The firm can produce at a lower cost but it holds back production to maximize profit P
ATC MC
PLR D
Excess Capacity MR Q
QLR
QProd Efficient 24
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25. Monopolistic Competition is inefficient, but other benefits accrue to society…
Product Variety
More Choices!
#AMERICA!
Innovation
Better Stuff!
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26. Practice Question
Assume there is a monopolistically competitive firm in long-run equilibrium. If this firm were to realize productive efficiency, it would:
A) have more economic profit.
B) have a loss.
C) also achieve allocative efficiency.
D) be under producing.
E) be in long-run equilibrium.
Answer is B.
Draw a monopolistic competitive graph in the long run. *
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27. 2008 Audit Exam
9.C