Post on 10-Apr-2018
transcript
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Imperfect Competition Continued
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Monopolistic Competition
Many sellers
Product differentia
tion each firm produces a slightly different versionof product
each has a monopoly on differentiated product
Free entry into industry drives profit to zero in long run
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Short-Run Equilibrium
Just like monopoly
Faces downward sloping demand and MR Maximizes profit by producing quantity at
which MC=MR
Enjoys economic profit if, at equilibrium,P>AC
Suffers loss if, at equilibrium, P
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$
0 Output
D, AR
MR
ACMC
Qe
Pe
ACe
Loss
Monopolistic Competition with
Short-Run Loss
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$
0 Output
D, AR
MR
AC
MC
Qe
PeACe=
Monopolistic Competition in
Long-Run Equilibrium
Zero profit
MCe
In equilibrium, P>MC
and the firm is NOToperating at the
minimum point of its
AC curve. For both
reasons, monopolistic
competition is notefficient.
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Characteristics of Equilibrium
Just as in the monopoly case, price exceeds
marginal cost in the short and long run
efficiency requires price to equal marginal cost
Just as with perfect competition, firms may
earn either positive or negative profits in the
short run but in the long run profits are zero
In the long run, there is excess capacity
the firm produces less than that which would
minimize costs
not efficient
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Advertising
Because price exceeds marginal cost, these
firms would love to sell more
the problem is that selling more requires lowering
the price unless more consumers decide to buy at the current price
The trick is to advertise
advertising increases demand
the demand curve AND marginal revenue curve shift
also creates brand loyalty
makes demand less elastic
increases markup of price over marginal cost
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The Debate over Advertising
The cons
waste of resources to make consumers think
they want something they dont really want
makes consumers think that there are
differences that dont really exist
impedes competition makes demand less elastic
increases inefficient markup of price over marginal cost
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The pros
increases competition by providing information
to consumers
price differences
location
new products
without advertising, it would be very difficult for new
firms to enter
advertising signals quality
even when nothing is said about quality in the ad!
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The Competitive Effects of
Advertising
Advertising impedes competition by
making demand less elastic
Advertising promotes competition byproviding information
The net effect appears to be pro-competitive
professionals like doctors, optometrists, andlawyers try to get state governments to prohibit
advertising as unprofessional
prices substantially lower when advertising
allowed
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Case Study: Advertisingand eyeglasses in 1960s, states varied considerably on laws
concerning advertising of eyeglasses
provided natural experiment of effect on prices
prohibition ofadvertising associated with 20%
higher prices
in 1970s, Florida repealed its ban on advertising
prices plummeted
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Advertising as aSignal of
Quality
Advertising can be very expensive
The willingness of firms to spend a lot on
ads with famous movie or sports stars is a
signal to consumers that they think their
product is good
firms that know their products are mediocre
will not be as willing to invest massively on aproduct that is likely to be rejected by
consumers
consumers are then rationally more likely to try
products that are expensively advertised
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The Effects of Brand Names
Are the resources that go into maintaining a
brand name a waste?
is there rea
llya
ny difference between Ba
yerand generic aspirin?
In many cases, society gets real benefits
gives consumers information about quality
when quality cannot be easily determined inadvance of purchase
gives producers strong incentive to maintain
quality to protect brand name
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Consider what happens when you pull offa
highway looking for something to eat theres Joes Dinerand McDonalds
most will pickMcDonalds because they know
exactly what they will get there and they have
no idea what they will get at Joes Diner
quality assurance is valuable to consumers
this brand identification is valuable to firms
M
cDona
lds will investa
lot to ma
inta
in it food poisoning at one store would be hugely costly to itsreputation
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Summary ofMarket Structures
Number of firms
Monopolyutilities
cable TV
Microsoft???
Oligopolycrude oil
autos
golf balls
One
firm Fewfirms
Product
Monopolistic
Competitioncereal
OTC drugs
toothpaste
PerfectCompetitionwheat
beef
nails
Differentiated Identical