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Monopolistic Competition and Oligopoly
Chapter 11
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Introduction Market structure is the focus real-world competition.
Market structure refers to the physical characteristics of the market within which firms interact. How do firms and people buy and sell?
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Introduction Market structure involves the number of firms in the market and the barriers to entry.
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Introduction Perfect competition, with an infinite number of firms, and monopoly, with a single firm, are polar opposites. Monopolistic competition lie between these two extremes. Keiretsu – business network
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Introduction Monopolistic competition is a market structure in which there are many firms selling differentiated products. There are few barriers to entry.
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11.1 Characteristics of Monopolistic Competition
Four distinguishing characteristics: Many sellers that do not take into account rivals’ reactions – each firm has a small share of the market Lack of Collusion with so many firms it’s hard to get together and collude Independence because of so many firms, each one acts independently. No firm takes into account the actions of other firms. 6
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Product Differentiation
Product differentiation implies that the products are different enough that the producing firms exercise a “mini-monopoly” over their product. The firms compete more on product differentiation than on price. Entering firms produce close substitutes, not an identical or standardized product.
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Single Monopolistically Competitive Firm
Short Run and Long Run in Monopolistic Competition Single Monoply Firm Single Monopolistically Competitive Firm P Profit P MC MC MR D,P MR D = P A Pm P = ATC MCM ATC A ATC QM QM Q Q
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11.2 Short-Run, Output, Price, and Profit of a Monopolistic Competitor
Like a monopoly, The monopolistic competitive firm has some monopoly power so the firm faces a downward sloping demand curve Marginal revenue is below price At profit maximizing output, marginal cost will be less than price Like a perfect competitor, zero economic profits exist in the long run 9
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A Monopolistically Competitive Firm: Above Normal Profit
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A Monopolistically Competitive Firm: Economic Loss
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A Monopolistically Competitive Firm: Normal Profit
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Entry and Normal Profit
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Comparing Perfect and Monopolistic Competition
Both the monopolistic competitor and the perfect competitor make zero economic profit in the long run.
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11.3 Long-Run Equilibrium in Monopolistic Long Run
It is possible for the monopolist to make economic profit in the long-run. No long-run economic profit is possible in monopolistic competition due to easy entry and differentiated products.
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Perfect Competition and Monopolistic Competition Compared
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Monopolistic Competition Compared with Perfect Competition Graph
MC In monopolistic competition in the long run, P > ATCmin In perfect competition in the long run, P = ATCmin ATC PMC DPC PPC Outcome: Monopolistic competition output is lower and price is higher than perfect competition DMC MRMC Q QMC QPC 17
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Monopolistic Competition Compared with Perfect Competition Graph
MC In monopolistic competition in the long run, P > min ATC, ATC PMC DPC PPC Outcome: Monopolistic competition output is lower (excess capacity) and price is higher than perfect competition DMC MRMC Q QMC QPC 18
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