1. Monopolistic Competition

2. MONOPOLISTIC COMPETITION Aims of lecture –To identify the meaning of monopolistic competition and distinguish it from other market structures –To demonstrate the profit-maximising price, output and profit for a firm under monopolistic competition in: a) the short run b) the long run –To examine the social implications of monopolistic competition

3. Market structures a)Perfect competition b)Monopolistic competition c)Oligopoly d)Monopoly MONOPOLISTIC COMPETITION

4. Imperfect competition –Two definitions Any industry where firms are not price takers –This includes pure monopoly Any industry where firms are not price takers but face competition from other firms –This excludes pure monopoly –Monopolistic competition Free entry –Oligopoly Restricted entry MONOPOLISTIC COMPETITION

5. Features of the four market structures

6. Small and Medium Sized Enterprises (SMEs) No. of firms Employment Turnover SMEs: under 250 employees Large enterprises: 250+ employees Source: SME Statistics UK, DTI

7. MONOPOLISTIC COMPETITION Assumptions of monopolistic competition –Large number of firms –Freedom of entry –Differentiated products Downward-sloping demand curve Each firm has some power over prices Equilibrium of the firm –short run MR = MC

8. £ Q O AR  D MC AC MR Short-run equilibrium of the firm under monopolistic competition

9. MONOPOLISTIC COMPETITION Equilibrium of the firm –long run If economic (supernormal) profits are made, new firms will be attracted into the industry Long-run equilibrium where: MR = MC (profit maximisation) AR = AC (no economic profits: just normal profit)

10. Long-run equilibrium of the firm under monopolistic competition £ Q O LRAC LRMC AR S  D S MR S

11. MONOPOLISTIC COMPETITION Assumptions of monopolistic competition Equilibrium of the firm –short run MR = MC –long run MR = MC; AR = AC –under-utilisation of capacity in long run

12. Under-utilisation of capacity in the long run £ Q O LRAC D L under monopolistic competition

13. The public interest –comparison with perfect competition MONOPOLISTIC COMPETITION

14. Long run equilibrium of the firm under perfect and monopolistic competition Production not at minimum AC Price not equal to MC Costs of product differentiation £ Q O P1P1 LRAC D L under monopolistic competition Q1Q1

15. MONOPOLISTIC COMPETITION E-Commerce: a case study –Low entry costs reduced capital and marketing costs outsourcing –Near perfect knowledge greater price transparency greater information on product availability –Reduction in firms’ power over prices greater competition (often global) ease for consumers to ‘shop around’ firms more flexible in sourcing their supplies

16. MONOPOLISTIC COMPETITION E-Commerce: a case study (cont.) –Constant striving by firms to reduce competition firms seeking to differentiate their product: ‘rent seeking’ mergers and acquisitions first-mover advantage

17. The public interest –comparison with perfect competition –comparison with monopoly no long-term economic profits –possibly lower price –BUT lack of economies of scale and less to plough back into investment choice for consumer –competition may improve quality and/or reduce costs MONOPOLISTIC COMPETITION

18. Limitations of the model –imperfect information –difficulty in identifying industry demand curve –entry may not be totally free –Indivisibilities: may allow economic profits even in long run –importance of non-price competition MONOPOLISTIC COMPETITION