Imperfect Competition Learning Objectives: LO1: Understand the importance and effects of product differentiation, including advertising LO2: Understand the differences between the two types of imperfect competition LO3: Explain why monopolistically competitive firms tend to have excess capacity and are unlikely to earn long-run economic profits CHAPTER © 2012 McGraw-Hill Ryerson Limited

Imperfect Competition A market structure in which producers are identifiable and have some control over price Two forms: 1.Monopolistic Competition 2.Oligopoly 11-2© 2012 McGraw-Hill Ryerson Limited LO1

Imperfect Competition Product Differentiation Attempt to distinguish a firm’s products from those of its competitors Firms often compete on basis other than price Logos, symbols, brand names, location, service, product development Often involves extensive advertising 11-3© 2012 McGraw-Hill Ryerson Limited LO1

Advertising Benefits of Advertising Provides the consumer with vital information Enhances competition between firms Lowers the prices of products Finances magazines and television shows 11-4© 2012 McGraw-Hill Ryerson Limited LO1

Advertising Criticisms of Advertising Mostly not informative and wasteful Encourages concentration within industries Raises prices to the detriment of consumers 11-5© 2012 McGraw-Hill Ryerson Limited LO1

Self-Test Assume that two firms dominate the running-shoes industry. One of them hires a high-profile sports figure to endorse its product by appearing in its advertising. a)What would you expect the other firm to do in response, and why? b)After the second firm has reacted in the way you said it would above, what do you think the relative share of the market that each firm enjoyed would be? c)Given your answer in b) above, what might these two firms be tempted to do? 11-6© 2012 McGraw-Hill Ryerson Limited LO1

Self-Test Assume that two firms dominate the running-shoes industry. One of them hires a high-profile sports figure to endorse its product by appearing in its advertising. a)What would you expect the other firm to do in response, and why? 11-7© 2012 McGraw-Hill Ryerson Limited LO1

Self-Test Assume that two firms dominate the running-shoes industry. One of them hires a high-profile sports figure to endorse its product by appearing in its advertising. b)After the second firm has reacted in the way you said it would above, what do you think the relative share of the market that each firm enjoyed would be? 11-8© 2012 McGraw-Hill Ryerson Limited LO1

Self-Test Assume that two firms dominate the running-shoes industry. One of them hires a high-profile sports figure to endorse its product by appearing in its advertising. c)Given your answer in b) above, what might these two firms be tempted to do? 11-9© 2012 McGraw-Hill Ryerson Limited LO1