1. Monopolistic Competition
Dr. Jennifer P. Wissink
©2011 John M. Abowd and Jennifer P. Wissink, all rights reserved.

2. Monopolistic Competition: Structure
Several firms in the market.
Firms produce differentiated products.
“Free” entry and exit.
Full and symmetric information.
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.

3. Monopolistic Competition: Differentiated Products
Re: Differentiated Products
Actual: taste, style, color, location, service, etc.
Re: Differentiated Products
Perceived: due to advertising and product affiliations

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

5. Monopolistic Competition: Long Run Conduct
Free entry will force firm long run economic profits to zero.
So at qmc need:
1) profit max
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

6. Monopolistic Competition: Performance
Efficiency:
Is the monopolistically competitive firm Pareto/Allocatively Efficient?
That is, at qMC is net social surplus maximized?
Does $MB=$MC at qMC?
answer: No.
Is the monopolistically competitive firm productively efficient?
Does the firm operate at minimum efficient scale? Is qmc at the minimum of the lratc curve?
answer: NO! There is “excess capacity.”
Is this “excess capacity” bad?
Is variety really the spice of life? $
lratc
lrmc
PMC
demand for GV jeans
qMC q
qmes
qpe mr