Micro Chapter 23 Presentation 1 Monopolistic Competition

Characteristics of Monopolistic Competition 1. Relatively large number of sellers- 25, 50 not hundreds or thousands 2. Differentiated Products-often by heavy advertising 3. Easy Entry/Exit from the industry

Characteristics Continued 4. Small market share 5. No collusion (situation where firms act together in order to fix prices, divide a market, or otherwise restrict competition) 6. Independent Actions- each firm can determine its own pricing policy

Examples of Monopolistic Competition In metropolitan areas: Grocery Stores, gas stations, barbershops, dry cleaners, clothing stores, medical care, and real estate agencies

Product Differentiation One firm’s product is distinguished from competing products by means of design, related services, quality, location or other attributes

Product Differentiation Examples 1. Product Attributes- differences in functional features, materials, design and workmanship Ex- PCs with different memory, speed etc. Retail stores, furniture stores

Product Differentiation Examples 2. Service- helpfulness of clerks, reputation, turnaround on delivery

Product Differentiation Examples 3. Location- Convenient stores v. large grocery stores, Motels close to freeway exits

Product Differentiation Examples 4. Brand Names and Packaging- Advil v. Generics Bottled water exclaiming “Pure Spring H2O” Use of celebrities to sell products

Product Differentiation Examples 5. Advertising- to make price less of a factor in consumer purchases and make product differences a greater factor = Nonprice Competition

Product Differentiation Examples 6. Some control over prices- if consumers prefer a certain brand, within limits, they will purchase the preferred product

Demand Curve Monopolistic Competition has a highly but not perfectly elastic demand curve Reasons: 1. Few rivals 2. Products are differentiated so they are not perfect substitutes

Profit In the long run, only a normal profit will be earned Normal profit- the payment made by a firm to obtain entrepreneurial ability (cost of doing business)

When Profits Occur New firms enter the industry Demand faced by existing curves shifts to the left (falls) because of new substitutes and reduces economic profits

Price and Output Determination In Monopolistic Competition Short-Run Profits Quantity Price and Costs MR = MC MC MR D1D1 ATC Economic Profit Q1Q1 A1A1 P1P1 0

When Losses Occur With SR losses, some firms will exit With fewer substitutes, the existing firms will have demand curves shift to the right (up) and eventually they will earn normal profits

Price and Output Determination In Monopolistic Competition Short-Run Losses Quantity Price and Costs MR = MC MC MR D2D2 ATC Loss Q2Q2 A2A2 P2P2 0

Quantity Price and Costs MR = MC MC MR D3D3 ATC Q3Q3 P3=A3P3=A3 0 Monopolistic Competition and Efficiency Recall: P=MC=Minimum ATC P4P4 Q4Q4 Price is Higher Excess Capacity at Minimum ATC Monopolistic Competition is Not Efficient