Monopolistic in Detail

8/9/2019 Monopolistic in Detail

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Copyright 1999 by Harcourt Brace & Company. All rights reserved.

Monopolistic Competition


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Product Differences

A differentiated product is one thatbuyers consider to be a good, but not

perfect,substitute for another.


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Market Characteristics

Each firm sells a differentiated product.

There is a large number of firms.

y The industry has enough firms that whenone cutsits prices, every other firm losesonly a small quantity of itssales.

The industry has free entry.


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Monopolistic Competition Short-

Run Equilibrium

Firms face a downward-sloping demandcurve.

The marginal revenue curve lies belowthe demand curve.


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Monopolistic Competition Short-

Run Equilibrium

Maximizing Profits

y Firms produce the quantity where marginalcost equal marginal revenue and charge thehighest price that sells that quantity.


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One Firm UnderMonopolistic

Competition

P

Q

D

MR


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Competition

P

Q

D

MR

ATC

MC


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Competition

200

$8

P

Q

D

MR

ATC

MC


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Competition

200

$8

$5

P

Q

D

MR

ATC

MC


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Monopolistic Competition Long-

Run Equilibrium

Profits encourage new firms to entermarkets.

New entriesshift the demand curve forexisting firms to the left.

Long-run equilibrium occurs when new

firmssee no further incentive to enter.


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Entry in a Monopolistically

Competitive Industry

P

D1

MR1 Q


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P

D1

MR1

ATC

MC

Q


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200

P

D1

MR1

ATC

MC

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$8


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200

P

D1

MR1

ATC

MC

MR2

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D2

$8


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Long-Run Equilibrium in


P

ATC

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MR2

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D2

$8


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Long-Run Equilibrium in


120

P

ATC

MC

$6

MR2

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D2

$8


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Short-Run Equilibrium with 3

Ice-Cream Stands

Your Spot on the Beach

Joannes Ice-Cream Stand

Lindas Ice-Cream Stand

Donnas Ice-Cream Stand


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Long-Run Equilibrium with 5 Ice-

Cream Stands

Your Spot on the Beach

Joannes Ice-Cream Stand


Donnas Ice-Cream Stand




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Excess CapacityandProduct

Variety

Monopolistically competitive firms haveexcess capacity in long-run equilibrium.

A firm hasexcess capacity if it can reduceits average cost by raising its output.

Average costs could be decreased by

reducing product variety.


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Is Monopolistic Competition

Inefficient?

Firms face a tradeoff between reducingtheir average costs and providing

product variety. Excess capacity may be the price that

people pay for product diversity and

choice.


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Versus Perfect Competition

Monopolistic competition issimilar toperfect competition.

y Each firms actsindependently, withoutregard to the responses of its competitors.

y Free entry guarantees that firms earn zeroeconomic profitsin the long-run.


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Versus Perfect Competition

Monopolistic competition differs fromperfect competition.

y Monopolistic competitors are not pricetakers.

y The firm's equilibrium price exceedsitsmarginal cost.

y Firms have excess capacity in long-runequilibrium.


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Versus Monopoly

Monopolistic competition differs frommonopoly.

y There is free entry in the long run.


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Nonprice Competition

Firmsin monopolistic competitionengage in nonprice competition.

y Provide better-quality products.y Product characteristics are designed to match

the preferences of specific groups ofconsumers.

y May involve location.


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A Business Location Decision

A

TownForest

B

C N

S

EW


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Profit-MaximizingProduct

Differentiation

People who like softerbrowniesbuy from you.

People who like chewierbrownies buy from the otherorganization.

Type of Brownie Sold bythe Other Organization

Type of Brownie that Your OrganizationShould Sell to Maximize Profit

Type of BrownieSofter Chewier


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Competition Among Cities and

States

Cities compete against each other in theareas of business,sports franchises, and

tourism.y The logic of monopolistic competitionsuggests these activities earn zero economicprofit in the long run.


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Advertising

Monopolistically competitive firmsadvertise to attract customers.

y A firmsincentive to advertise depends onthe extent of its product differentiation.


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End of Chapter 15


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By Rupal Jain

Monopolistic Competition is a market structure in which there are several or many sellers;

each produce similar, but slightly differentiated products. Differentiation can be on the basis of

colour, design, size, taste, fragrances, etc. Each producer can set its price and quantity without

affecting the marketplace as a whole.Wikipedia explains the concept as, A common market form. Many marketers can be

considered monopolistically competitive, often including the markets for restaurants, cereal,clothing, shoe, and service industry in large cities.

Monopolistic Competition differs from perfect competition in that production does not take

place at the lowest possible cost. Because of this, the firms are left with excess productioncapacity.

This market concept was developed by Chamberlin (USA) and Robinson (Great Britain)

Investopedia. Chamberlin and Robinson also described this situation as an imperfect

competition as the market does not have the conditions required for perfect competition.

T he ch aract eri stic s of Monopol ist ic Compet it ion a re st at ed be low: -

1. It has both the elements of Monopoly and Perfect Competition.2. Large number of buyers and sellers in the market.

3. Non-Price difference (product differentiation) among the competitive products.4. Few entry as well as exit barriers.

5. All the sellers have relatively small market share.6. All the firms are profit maximizes.7. Each firm has a limited ability to affect its output price.8. The buyers and sellers have sufficient knowledge of the given market.

9. Demand is more elastic than with Oligopolistic /Monopolistic market.

10. The firms in Monopolistic Competition do not produce optimum / maximum quantity ofoutput and hence they are unable to achieve economies of scale in business.

11. Such market structure increases the cost of transportation and other resources.12. The demand curve is downward sloping.

Finally, Monopolistic Competition has been rightly explained by Business Dictionaryas, A Market situation midway between the extremes of perfect competition and monopoly,and displaying features of the both.

In such situations firms are free to enter a highly competitive market where severalcompetitors offer products that are close (but not perfect) substitutes and, therefore, prices areat the level of average costs (a feature of perfect competition).

Also, some consumers have a preference for one product over another that is strong enough to

make them keep buying it even when its price increases, thus giving its producer a smallamount of market power (a feature of monopoly).

Monopolistic situation is a common situation in all free markets.

Monopolistic in Detail

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