Monopolistic Competition: The Competitive Model in a More Realistic Setting

Starbucks: Growth through Product Differentiation After studying this chapter, you should be able to: Explain why a monopolistically competitive firm has a downward-sloping demand curve. Explain how a monopolistically competitive firm decides the quantity to produce and the price to charge. Analyze the situation of a monopolistically competitive firm in the long run. Compare the efficiency of monopolistic competition and perfect competition. Define marketing and explain how firms use it to differentiate their products. Identify the key factors that determine a firm’s profitability. 1 2 3 LEARNING OBJECTIVES 4 …the coffeehouse market is monopolistically competitive, rather than perfectly competitive. 5 6

Monopolistic Competition: The Competitive Model in a More Realistic Setting Monopolistic competition A market structure in which barriers to entry are low, and many firms compete by selling similar, but not identical, products.

The Demand Curve for a Monopolistically Competitive Firm LEARNING OBJECTIVE 1 Demand and Marginal Revenue for a Firm in a Monopolistically Competitive Market The Demand Curve for a Monopolistically Competitive Firm 12 - 1 The Downward-Sloping Demand for Caffe Lattès at a Starbucks

Demand and Marginal Revenue for a Firm in a Monopolistically Competitive Market Marginal Revenue for a Firm with a Downward-Sloping Demand Curve 12 – 1 Demand and Marginal Revenue at a Starbucks CAFFÈ LATTES SOLD PER WEEK (Q) PRICE (P) TOTAL REVENUE (TR = P x Q) AVERAGE REVENUE (AR – TR/Q) MARGINAL REVENUE (MR = ΔTR/ΔQ) 1 2 3 4 5 6 7 8 9 10 $6.00 5.50 5.00 4.50 4.00 3.50 3.00 2.50 2.00 1.50 1.00 $0.00 10.00 13.50 16.00 17.50 18.00 - $5.50 0.50 -0.50 -1.50 -2.50 -3.50

Demand and Marginal Revenue for a Firm in a Monopolistically Competitive Market Marginal Revenue for a Firm with a Downward-Sloping Demand Curve 12 - 2 How a Price Cut Affects a Firm’s Revenue

Demand and Marginal Revenue for a Firm in a Monopolistically Competitive Market Marginal Revenue for a Firm with a Downward-Sloping Demand Curve 12 - 3 The Demand and Marginal Revenue Curves for a Monopolistically Competitive Firm

LEARNING OBJECTIVE 2 How a Monopolistically Competitive Firm Maximizes Profits in the Short Run 12 - 4 Maximizing Profit in a Monopolistically Competitive Market

What Happens to Profits in the Long Run? LEARNING OBJECTIVE 3 What Happens to Profits in the Long Run? How Does Entry of New Firms Affect the Profits of Existing Firms? 12 - 5 How Entry of New Firms Eliminates Profits Don’t Confuse Zero Economic Profit with Zero Accounting Profit

What Happens to Profits in the Long Run? How Does Entry of New Firms Affect the Profits of Existing Firms? 12 – 2 The Short Run and the Long Run For a Monopolistically Competitive Firm

12 - 1 The Rise and Fall of Apple’s Macintosh Computer Macintosh lost its differentiation, but still has a loyal – if small – following.

12 - 2 The Short Run and the Long Run for the Macintosh LEARNING OBJECTIVE 3 The Short Run and the Long Run for the Macintosh

What Happens to Profits in the Long Run? Is Zero Economic Profit Inevitable in the Long Run? A firm’s profits will be eliminated in the long run only if the firm stands still and fails to find new ways of differentiating its product or fails to find new ways of lowering the cost of producing its product.

12 - 2 Staying One Step Ahead of the Competition: Eugène Schueller and L’Oréal Unlike many monopolistically competitive firms, L’Orèal has earned economic profits for a very long time.

Comparing Perfect Competition and Monopolistic Competition LEARNING OBJECTIVE 4 Comparing Perfect Competition and Monopolistic Competition 12 - 6 Comparing Long-Run Equilibrium under Perfect Competition and Monopolistic Competition

Comparing Perfect Competition and Monopolistic Competition Excess Capacity under Monopolistic Competition The profit-maximizing level of output for a monopolistically competitive firm comes at a level of output where price is greater than marginal cost and the firm is not at the minimum point of its average total cost curve. How Consumers Benefit from Monopolistic Competition Consumers benefit from being able to purchase a product that is differentiated and more closely suited to their tastes.

Did Abercrombie and Fitch narrow its target market too much? 12 - 3 Abercrombie and Fitch: Can the Product Be Too Differentiated? Did Abercrombie and Fitch narrow its target market too much?

How Marketing Differentiates Products LEARNING OBJECTIVE 5 How Marketing Differentiates Products Marketing All the activities necessary for a firm to sell a product to a consumer. Brand Management Brand Management The actions of a firm intended to maintain the differentiation of a product over time.

What Makes a Firm Successful? LEARNING OBJECTIVE 6 What Makes a Firm Successful? 12 - 7 What Makes a Firm Successful?

Midnight Snack Figure 1: Product differentiation shifting the demand curve for a monopolistic competitor Figure 2: “Spreading the overhead”

Brand management Marketing Monopolistic Competition