Monopolistic Competition

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Presentation transcript:

Monopolistic Competition

Under monopolistic competition… large number of small firms Monopolistic competition: a common market structure in which firms have many competitors, but each one sells a slightly different product. Under monopolistic competition… large number of small firms each firm can ignore the consequences of its actions on the other firms in the market. produce similar but slightly different products. produce heterogeneous (differentiated) products.

Product differentiation Product differentiation: the act of making a product that is slightly different to the product of a competing firm. Homogeneous or heterogeneous – consumers decide!

Techniques of product differentiation include

Point of Product Differentiation? Greater real or perceived differentiation, the less price elastic demand becomes.

Examples Each firm a mini-monopoly. But, monopolistically competitive firms compete New firms free to enter the market.

Difference Between Monopoly and Monopolistic Competition Monopoly Entry completely blocked Monopolistic Competition Free entry into market

Difference Between Perfect and Monopolistic Competition Perfect Competition Homogenous products Horizontal demand curve Monopolistic Competition Differentiated products Downward facing demand curve

The short run equilibrium of the firm under monopolistic competition MR intersects halfway between the price axis & demand (AR) The short run equilibrium of the firm under monopolistic competition Downward-sloping D = AR PED > monopoly Profit is maximised where MR = MC P1; Q1 Economic profit per unit = AR - AC at Q1.

The long run equilibrium of the firm under monopolistic competition MR = MC & AR = AC. AR curve tangent to AC curve. Demand falls (substitutes). D & MR shift left. Economic profits eliminated No further entry into the industry. D becomes more price elastic (more close substitutes)