1. Chapter 13 Monopolistic Competition McGraw-Hill/Irwin
Copyright © 2009 by The McGraw-Hill Companies, Inc. All rights reserved.

2. Monopolistic Competition
Relatively large # of sellers (Small % of total market)
Similar but not identical products. Product differentiation= non-price competition (services , delivery, Lexus, travel agent, laundry, barbershop ..). Location is another type of differentiation. (mini-marts , motels, restaurant,..). Brand names and packaging lead to perceived differences.( Aspirin, water bottle design, Celebrity & Products, mini size products
Allows producers to have some control over the prices of their products.
Free entry and exit to the industry.
Advertising= non-price competition : they advertise to let consumer know about the difference of their product. Affect demand curve
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3. Monopolistic Competition (M.C.): Demand Curve
The firm’s demand curve is elastic.

4. M.C. Profits in SR Short-Run Profits Price and Costs Quantity Economic
ATC MC P1 A1
Price and Costs
Economic
Profit D1
MR = MC MR Q1
Quantity
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5. M.C. Profits in SR Short-Run Losses Price and Costs Loss Quantity ATC
MR = MC MR Q2
Quantity
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6. M.C. Profits in LR LR profits = 0 Normal Profit (Free Entry&Exit)
ATC
P3= A3
Price and Costs D3
MR = MC MR Q3
Quantity
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7. Advertising Prevalent in monopolistic competition and oligopoly
Capture market share
Better than a price cut
Information for consumers
Manipulation
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8. Monopolistic Competition
P=MC=Min ATC for pure competition (recall)
Quantity
Price and Costs
MR = MC MC MR D3
ATC Q3
P3= A3 P4
Price is Lower
Excess Capacity at
Minimum ATC Q4
Monopolistic competition is not efficient
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9. Monopolistic Competition (M.C.): The good, The bad
The Good: Consumer: diversity of choices
The bad: Inefficiency of M.C. Firms, less output, consumers pay for advertising indirectly