1. Monopolistic Competition

2. Starter Draw a table comparing the key characteristics of PC and MC
Under PC
Under MC

3. Syllabus aims
Understand the characteristics of a monopolistically competitive market and be able to use these to explain the behaviour of firms in this market structure.
Students should be able to carry out diagrammatic analysis of the market structure in both the short and long run.
Students should understand the importance of advertising and differentiation for the model of monopolistic competition and be able to contrast this with other market structures.
Students should be able to explain and evaluate the efficiency of monopolistic competition.

4. Advertising Is there any differentiation between these three?
Is there any opportunity for differentiation?
How have these brands attempted to influence you as a consumer?

5. Role of Advertising in MC
Firms produce differentiated products
Face downward sloping demand curves
Build up brand loyalty
Gives them some influence over price
=> engage in heavy advertising to maintain brand loyalty
When we analyse markets we look at how firms BEHAVE under different market conditions

6. The diagrams!

7. Diagrams – your go Side by side
Draw the curve for profit maximisation under monopoly
Draw the curve for profit maximisation under PC
I’ll start you off…

8. The role of advertising in monopolistic competition
With abnormal profits and ‘no’ barriers to entry
Companies use significant advertising to encourage brand loyalty & customer
There is a lot of product differentiation
As more companies enter the market – the individual company’s Demand curve might shift LEFT – due to substitution effect
So the companies spend MORE money on advertising – which will push up their AC curve

9. Dual effect The inward shift of the Demand curve
The outward shift of the MC curve
….. Will result in a Normal profit scenario

10. The effect of advertising Short run equilibrium under MC
Long run equilibrium under MC

11. Normal profit under monopolistic competition
At any other output ATC >AR, so the firm will make losses.

12. Is there ever an equilibrium?
Strong brand loyalty can have the effect of making demand less sensitive to price.
The long run equilibrium may be reached with normal profits being made. The reality is that a stable equilibrium is never reached - new products come and go all of the time, some do better than others.
Existing products within a market will typically go through a product life cycle which affects the volume and growth of sales.

13. Efficiencies

14. Productive efficiency
No – since Qm rather than Qo
There is a market shortage
They are also not maximising their economies of scale

15. Allocative efficiency?
No since Pm > MC
In a truly competitive market the Po would exist – so there is misuse of the consumer surplus
Consumers are over charged and firms produce under their capacity

16. Dynamic Efficiency There are profits for product development.
There is an incentive for the companies to invest in R&D & new ideas…. As the product is always being developed
So YES – there is an incentive to be dynamically efficient.

17. Wasteful advertising? It can increase costs
The debate over the environmental impact of packaging is linked strongly to this aspect of monopolistic competition.