1. Monopolistic Competition
Microeconomics
Monopolistic Competition
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2. MONOPOLISTIC COMPETITION
A market form in which there is:
1) Product differentiation.
2) Many firms.
3) Easy entry and exit.
Monopolistic competition

3. The importance of monopolistic competition is that it seems to explain aspects of many important real world markets.
Monopolistic competition

4. SOME EXAMPLES Shoe stores Pizza parlors Fast food, in general
Local moving companies
Hand calculators
PC compatible clones
Others you can think of ...
Monopolistic competition

5. Greasy Sam’s Hamburgers
The demand curve facing a monopolistically competitive firm looks very much like that facing a monopoly, but it is very elastic due to the presence of many close substitutes.
$/Q D Q
Greasy Sam’s Hamburgers
Monopolistic competition

6. Greasy Sam’s Hamburgers
Because the demand curve is negatively sloped marginal revenue must be less than average revenue.
$/Q D Q
Greasy Sam’s Hamburgers MR
Monopolistic competition

7. The short-run analysis of the monopolistically competitive firm proceeds exactly as for monopoly, because in the short-run entry and exit are not possible.
Monopolistic competition

8. Greasy Sam’s Hamburgers
With the the cost curves shown below, the firm can maximize profits by choosing output where MC = MR.
$/Q AC MC p* D Q Q*
Greasy Sam’s Hamburgers MR
Monopolistic competition

9. Greasy Sam’s Hamburgers
Profits are shown by the shaded area.
$/Q AC MC p* D Q Q*
Greasy Sam’s Hamburgers MR
Monopolistic competition

10. Greasy Sam’s Hamburgers
What happens in the long-run, as firms can enter or leave?
The following hidden slide shows the process.
$/Q AC MC p* D Q Q*
Hidden slide
Greasy Sam’s Hamburgers MR
Monopolistic competition

11. Do monopolistically competitive firms operate in society’s interest
Do monopolistically competitive firms operate in society’s interest? Do they produce outputs and sell at prices which maximize surplus? Are the firms economically efficient?
Monopolistic competition

12. SUMMARY OF MONOPOLISTIC COMPETITION
1) In the short-run firms choose price and output by setting MC = MR.
2) In the long-run entry of new firms assures that profit will be zero.
3) Some economic inefficiency exists because in equilibrium price is higher than marginal cost.
Monopolistic competition

13. Comparison of market structure
Perfect competition
Monopolistic competition
Oligopoly
Monopoly
Economic efficiency
P = MC
P > MC
P >MC
Cost
Efficient scale
Below eff. scale
Not likely efficient scale
Economic profit
Likely > 0
Monopolistic competition