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. Lesson aims Review characteristics of MC
Recognise the importance of advertising and differentiation In MC
Diagrammatically explain short and long run equilibrium in MC
To explain and evaluate the efficiency of monopolistic competition.

5. Key characteristics of Monopolistic Competition
What’s the difference to PC?
There are many producers and many consumers in a market - the concentration ratio is low & they act independently.
The barriers to entry and exit into and out of the market are low
The firms are short run profit maximisers.
Consumers see that there are non-price differences among the competitors’ products i.e. there is product differentiation
Producers have some control over price - they are “price makers” rather than “price takers.”

6. Key characteristics In detail….
Get into the pattern of how we analyse markets:
Define characteristics
Behaviour of firms
The diagrams
Assess efficiency

7. Product differentiation
Firms produce differentiated products, although there are substitutes for each firm’s products.
There is a downward sloping D curve – and elastic!
Each firm tries to build brand loyalty to create loyal customers.
There tends to be heavy advertising

8. Ease of entry & exit There are ‘no’ barriers to entry & exit.
The existence of short term abnormal profits gives incentives for other companies to start up.
The existence of short term losses give incentives for companies to close down!

9. Low concentration ratios
Monopolistic Competition - Intro
Low concentration ratios
What is the concentration ratio of a monopoly?
What is the concentration ratio of a duopoly?
What is the concentration ratio of a oligopoly?
What concentration ratio ‘border line’ will there be for a monopolistic competitive market?
No concentration: 0% means perfect competition or at the very least monopolistic competition. If for example CR4=0 %, the 4 largest firm in the industry would not have any significant market share.
• Total concentration: 100% means an extremely concentrated oligopoly. If for example CR1= 100%, we talk of a monopoly.
• Low concentration: 0% to 50%
This category ranges from perfect competition to oligopoly.
• Medium concentration: 50% to 80%
An industry in this range is likely an oligopoly.
• High concentration: 80% to 100%
This category ranges from oligopoly to monopoly
Mr Mercer's Notes

10. Low concentration ratios
Monopolistic Competition - Intro
Low concentration ratios
Under MC concentration ratio tends to be low so many firms operating in the market. A price change by one will have negligible effects on the demand for rival products
No concentration: 0% means perfect competition or at the very least monopolistic competition. If for example CR4=0 %, the 4 largest firm in the industry would not have any significant market share.
Total concentration: 100% means an extremely concentrated oligopoly. If for example CR1= 100%, we talk of a monopoly.
Low concentration: 0% to 50%. This category ranges from perfect competition to oligopoly.
Medium concentration: 50% to 80%. An industry in this range is likely an oligopoly.
High concentration: 80% to 100%. This category ranges from oligopoly to monopoly
No concentration: 0% means perfect competition or at the very least monopolistic competition. If for example CR4=0 %, the 4 largest firm in the industry would not have any significant market share.
• Total concentration: 100% means an extremely concentrated oligopoly. If for example CR1= 100%, we talk of a monopoly.
• Low concentration: 0% to 50%
This category ranges from perfect competition to oligopoly.
• Medium concentration: 50% to 80%
An industry in this range is likely an oligopoly.
• High concentration: 80% to 100%
This category ranges from oligopoly to monopoly
Mr Mercer's Notes

11. 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?

12. 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

13. The diagrams!

14. 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…

15. 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

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

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

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

19. 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.

20. Efficiencies

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

22. 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

23. 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.

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

25. Plenary
Post-its
List 4 characteristics of MC
Draw the LR equilibrium

26. Peter Smith p51 diagram ex 3.1 & Anderton Textbook p344 Q2 Due Oct 18
Homework
Peter Smith p51 diagram ex 3.1
&
Anderton Textbook p344 Q2
Due Oct 18