Tablet computing 1. How many buyers & how many sellers are there in this market? Give examples. 2. Approximately, what type of concentration ratio is there in this market? 3. How easy do you think it is for someone to enter & exit this market? 4. What type of knowledge do consumers have? 5. To what extent is there product differentiation or product branding? Give examples. 6. Do the companies have some control over the price? Are they price makers or takers? Give examples. 7. Is there evidence that they capable of making short term profits?

HOMEWORK Questions EITHER use The Economist article on Tablet computers OR Think about a local area that you know well… Choose one of the following ‘business areas’ and complete the Q’s opposite… Local restaurants Coffee shops Hairdressers Small-scale children’s nurseries Independent hotels Local Coach Companies 1. How many buyers & how many sellers are there in this market? Give examples. 2. Approximately, what type of concentration ratio is there in this market? 3. How easy do you think it is for someone to enter & exit this market? 4. What type of knowledge do consumers have? 5. To what extent is there product differentiation or product branding? Give examples. 6. Do the companies have some control over the price? Are they price makers or takers? Give examples. 7. Is there evidence that they capable of making short term profits? Watch PAJ Holden on MC…learn the diagram for next time!

Monopolistic Competition

Key characteristics of Monopolistic Competition There are many producers and many consumers in a market - the concentration ratio is low & they act independently. The barriers to entry and exit into and out of the market are low The firms are short run profit maximisers. Consumers see that there are non-price differences among the competitors’ products i.e. there is product differentiation Producers have some control over price - they are “ price makers ” rather than “price takers.” What’s the difference to PC?

Role of Advertising in MC Firms produce differentiated products Face downward sloping demand curves Build up brand loyalty Gives them some influence over price => engage in heavy advertising to maintain brand loyalty When we analyse markets we look at how firms BEHAVE under different market conditions

The diagrams!

Diagrams – your go Side by side Draw the curve for profit maximisation under monopoly Draw the curve for profit maximisation under PC I’ll start you off…

The role of advertising in monopolistic competition With abnormal profits and ‘no’ barriers to entry Companies use significant advertising to encourage brand loyalty & customer There is a lot of product differentiation As more companies enter the market – the individual company’s Demand curve might shift LEFT – due to substitution effect So the companies spend MORE money on advertising – which will push up their AC curve

Dual effect The inward shift of the Demand curve The outward shift of the MC curve ….. Will result in a Normal profit scenario

Short run equilibrium under MC Long run equilibrium under MC The effect of advertising

Normal profit under monopolistic competition At any other output ATC >AR, so the firm will make losses.

Is there ever an equilibrium? Strong brand loyalty can have the effect of making demand less sensitive to price. The long run equilibrium may be reached with normal profits being made. The reality is that a stable equilibrium is never reached - new products come and go all of the time, some do better than others. Existing products within a market will typically go through a product life cycle which affects the volume and growth of sales.

Efficiencies

Productive efficiency No – since Qm rather than Qo There is a market shortage They are also not maximising their economies of scale

Allocative efficiency? No since Pm > MC In a truly competitive market the Po would exist – so there is misuse of the consumer surplus Consumers are over charged and firms produce under their capacity

Dynamic Efficiency There are profits for product development. There is an incentive for the companies to invest in R&D & new ideas…. As the product is always being developed So YES – there is an incentive to be dynamically efficient.

Wasteful advertising? It can increase costs The debate over the environmental impact of packaging is linked strongly to this aspect of monopolistic competition.

Plenary Post-its List 4 characteristics of MC Draw the LR equilibrium