Monopolistic Competition Lecture 26 Dr. Jennifer P. Wissink ©2019 Jennifer P. Wissink, all rights reserved. May 1, 2019

Sample Problem Solving – Let’s Do This! Suppose you are given this demand information: Adults: QA = 100 – 2P OR PA = 50 – 1/2Q Kids: QK = 80 – 2P OR PK = 40 – 1/2Q Suppose you are given this cost information: total cost = 15Q, where Q = QA+QK  fc=0 and avc = atc = mc = 15 Find: the simple monopoly solution (SM) the 1st degree price discrimination solution (FD) the 3rd degree price discrimination solution (TD)

The Simple Monopoly Solution Revenue Side: Adults: QA = 100 – 2P OR PA = 50 – 1/2Q Kids: QK = 80 – 2P OR PK = 40 – 1/2Q Cost Side: tc = 15Q, where Q = QA+QK  mc=atc=avc=15 mc=atc=avc 15 D mrSM

The Simple Monopoly Solution: QSM=60 and PSM=$30 Adults: QA = 100 – 2P OR PA = 50 – 1/2Q tc = 15Q, where Q = QA+QK  mc=atc=avc=15 Kids: QK = 80 – 2P OR PK = 40 – 1/2Q tc = 15Q, where Q = QA+QK  mc=atc=avc=15 mc=atc=avc mc=atc=avc 15

The First Degree Price Discrimination Monopoly Solution mc=atc=avc mc=atc=avc 15 Adults: QA = 100 – 2P OR PA = 50 – 1/2Q tc = 15Q, where Q = QA+QK  mc=atc=avc=15 Kids: QK = 80 – 2P OR PK = 40 – 1/2Q tc = 15Q, where Q = QA+QK  mc=atc=avc=15

Third Degree Price Discrimination Adults: QA = 100 – 2P OR PA = 50 – 1/2Q tc = 15Q, where Q = QA+QK  mc=15 Kids: QK = 80 – 2P OR PK = 40 – 1/2Q tc = 15Q, where Q = QA+QK  mc=15

Summary: Sample Problem Solving PA PK QA QK QTot profit $NSS $PS $CS SM $30 40 20 60 $900 $1400 $500 FD 70 different, last=$15 50 different, last=$15 70 50 120 $1850 $0 TD $32.50 $27.50 35 25 $925 $1387.50 $462.50 i>clicker question: Why are the values for profit equal to the values for producers’ surplus? Because they always are, silly. Because Prof Wissink did it wrong. Because this is a monopoly market. Because it’s just a coincidence. Because fixed costs equal zero in this problem.

Up Next: Monopolistic Competition

Monopolistic Competition: Structure Several firms in the market. Firms produce differentiated products. “Free” entry and exit. Full and symmetric information. Re: Differentiated Products Actual: taste, color, location, service, etc. Perceived: lei jeans vs. Wranglers! Intellectual “Parents” Joan Robinson (economist at Cambridge in the U.K.) Edward Chamberlin (economist at Harvard in Cambridge, MA) Both pioneered the work on monopolistic competition in the early 1930’s. “The purpose of studying economics is not to acquire a set of ready-made answers to economic questions, but to learn how to avoid being deceived by economists.”

Monopolistic Competition: Short Run Conduct Looks and acts just like a mini-simple-monopolist. srmc $ sratc PMC atcMC demand for GV Jeans q qMC mr

Monopolistic Competition: Long Run Conduct Free entry will force firm long run economic profits to zero. So at qmc need: 1) profit max and 2) zero profit and 3) a downward sloping firm demand and corresponding marginal revenue.  Firm’s demand curve will be tangent to its long run average total cost curve. $ lratc lrmc PMC demand for GV jeans q qMC mr

Monopolistic Competition: Performance (Efficiency & Equity) i>clicker question Is the monopolistically competitive firm Pareto/Allocatively Efficient (AE)? A. Yes. B. No. C. Maybe so i>clicker question Is the monopolistically competitive firm productively efficient (pe)? A. Yes. B. No. C. Maybe so $ lratc lrmc PMC demand for GV jeans q qMC mr