Monopolistic Competition MicroMod8

Best of Both Worlds? Seems contradictory but these firms: are monopolistic face downward sloping demand curve because their product is unique, differentiated (unlike perfect competition) & can make own price (like monopoly) are competitive most common type of firm in the marketplace nearly free entry into and exit from the market (like perfect competition) no economic profits in the long term

Best of Both Worlds? Basically the whole module is explained on Table 1 on page 345 Traits shared with all market structures Goal is to maximize profits Maximizing rule - set Q where MR = MC Can earn economic profits in the short run Traits shared ONLY with monopolies, oligopolies P > MC not a price taker creates a deadweight loss for society Traits shared ONLY with perfect competition Many firms easy entry and exit No economic profits in long run

Short Run Operations Graph very similar to monopoly graph except for thinner profit area usually more elastic demand curve (more choices for consumers) MonComps always produce on downward slope of ATC - phenomenon called excess capacity that is MonComps could always choose to produce more at efficient scale but do not to maintain higher profit margin

Short Run Operations

Comparison

Comparison

Observations Perfect competition no deadweight loss - social economic welfare maximized but difficult for producers in short term, zero profit in long term Monopoly largest deadweight loss - social economic welfare minimized but easy for producers in short, much profit in long term too

Observations Oligopolies act like mini-monopolies mathematically but eventually profits will attract more producers and move towards perfect competition in long run if collusion force is weak and can’t fix prices

Observations MonComps have smallest deadweight loss - no effective government intervention to eliminate deadweight loss is realistically possible firms are too numerous and markets too diverse administrative costs would exceed economic welfare profits

Observations In long run though like perfect competition, MonComps will make zero economic profit because of easy entry and exit Increased competition flattens demand curve but when firms begin to experience losses, firms leave the market  less substitutes available, demand becomes more inelastic and climbs above ATC again

Related Externalities Product-variety New products enter market, flattens demand, generates more consumer surplus Business-stealing New products enter market, flattens demand, takes away customers and profits from existing producers

Advertising The art of reducing the effects of the externalities of competition by reaching out to potential customers and providing them with information about your products

To Ad or Not to Ad? Pros Cons Ads provides consumers with vital information Ad content matters little - cost of ad itself indicator of company’s faith in quality of the product Cons Ads often mislead consumers Cause them to act in a way that is contrary to Law of Demand - pay too much for goods when they should find cheaper substitutes

Brand Effects Ads are tied to product branding Brand name goods sold right next to other generics for a higher price

Brand Effects Brand name companies then forced to maintain perception of higher quality to justify higher prices → therefore have to advertise more

Brand Effects Brand names more familiar in marketplace, could often be cheaper and better products out there but they are unknown to customers