Chapter 13 Monopolistic Competition McGraw-Hill/Irwin Copyright © 2009 by The McGraw-Hill Companies, Inc. All rights reserved.

Monopolistic Competition Relatively large # of sellers (Small % of total market) Similar but not identical products. Product differentiation= non-price competition (services , delivery, Lexus, travel agent, laundry, barbershop ..). Location is another type of differentiation. (mini-marts , motels, restaurant,..). Brand names and packaging lead to perceived differences.( Aspirin, water bottle design, Celebrity & Products, mini size products Allows producers to have some control over the prices of their products. Free entry and exit to the industry. Advertising= non-price competition : they advertise to let consumer know about the difference of their product. Affect demand curve 11-2

Monopolistic Competition (M.C.): Demand Curve The firm’s demand curve is elastic.

M.C. Profits in SR Short-Run Profits Price and Costs Quantity Economic ATC MC P1 A1 Price and Costs Economic Profit D1 MR = MC MR Q1 Quantity 11-4

M.C. Profits in SR Short-Run Losses Price and Costs Loss Quantity ATC MR = MC MR Q2 Quantity 11-5

M.C. Profits in LR LR profits = 0 Normal Profit (Free Entry&Exit) ATC P3= A3 Price and Costs D3 MR = MC MR Q3 Quantity 11-6

Advertising Prevalent in monopolistic competition and oligopoly Capture market share Better than a price cut Information for consumers Manipulation 11-7

Monopolistic Competition P=MC=Min ATC for pure competition (recall) Quantity Price and Costs MR = MC MC MR D3 ATC Q3 P3= A3 P4 Price is Lower Excess Capacity at Minimum ATC Q4 Monopolistic competition is not efficient 11-8

Monopolistic Competition (M.C.): The good, The bad The Good: Consumer: diversity of choices The bad: Inefficiency of M.C. Firms, less output, consumers pay for advertising indirectly