Monopolistic Competition

Monopolistic Competition (m.c.) large number of independent sellers no or low barriers to entry differentiated product

differentiated products products that are distinguished from similar products by such characteristics as quality, design, and location. examples: service stations, aspirin, tissues, retail stores

Demand Curve for the Monopolistic Competitor’s Product Since the product is differentiated, there is some brand loyalty and the firm has some control over price. Since there are good substitutes available, however, the demand curve is fairly elastic.

The demand curve for the monopolistic competitor’s product is flatter than the demand curve for the monopolist’s product, but not horizontal like the demand curve for the perfect competitor’s product. p.c. m.c. monopoly P P P D D D Q Q Q

Apart from the fact that the demand curve for the monopolistic competitor’s product is technically flatter than the demand curve for the monopolist’s product, the graphs look essentially the same.

Monopolistic Competitor making positive economic profits

Profit-maximizing output: where MR = MC $ ATC MR D Q* quantity

Determine the price from the demand curve, above Q*. MC $ ATC P* MR D Q* quantity

Determine the cost per unit from the ATC curve, above Q*. MC $ ATC P* ATC* MR D Q* quantity

Determine the TR = PQ box. MC $ ATC P* ATC* MR D Q* quantity

Determine the TC = ATC . Q box. MC $ ATC P* ATC* MR D Q* quantity

The difference between TR and TC is profit. MC $ ATC P* ATC* profit MR D Q* quantity

Monopolistic Competitor with a loss

Profit-maximizing or loss-minimizing output: where MR = MC ATC MC $ AVC MR D Q* quantity

Determine the price from the demand curve, above Q* ATC MC $ AVC P* MR D Q* quantity

Determine the cost per unit from the ATC curve, above Q* MC $ AVC ATC* P* MR D Q* quantity

Determine the TC = ATC . Q box MC $ AVC ATC* P* MR D Q* quantity

Determine the TR = PQ box. ATC MC $ AVC ATC* P* MR D Q* quantity

The difference between TR and TC is profit or loss. ATC MC $ AVC ATC* P* loss MR D Q* quantity

Monopolistic Competitor Breaking Even (Zero Economic Profit)

Profit-maximizing output: where MR = MC (directly below the tangency of D and ATC) $ ATC MR D Q* quantity

Determine the price from the demand curve, above Q* MC $ ATC P* MR D Q* quantity

Determine the cost per unit from the ATC curve, above Q* MC $ ATC ATC* = P* MR D Q* quantity

Determine the TR = PQ box. MC $ ATC ATC* = P* MR D Q* quantity

Determine the TC = ATC . Q box. MC $ ATC ATC* = P* MR D Q* quantity

Since TR = TC, profit is zero. MC $ ATC ATC* = P* MR D Q* quantity

Possibilities for the Monopolistic Competitor short run: positive profits, losses, or breaking even. long run: breaking even.

Similarities between perfect competition and monopolistic competition Profits must be zero in long run equilibrium. Firms are responsive to changes in demand conditions. Competition in the pursuit of profit encourages resource movements that are efficient.

Differences between perfect competition and monopolistic competition In long run equilibrium, the perfectly competitive firm is at the minimum of the ATC curve. The monopolistically competitive firm is not. For perfectly competitive firms, P = MC. For monopolistically competitive firms, P > MC. Perfectly competitive firms don’t advertise because everyone knows the products are all the same. Monopolistic competitors advertise to convince consumers that their product is better than others.