Monopolistic

Competition

Trilok Prajna Prasad K Khushboo Akash

• Large number of Sellers• Selling identical products• Difference in quality, features

etc.

Edward Chamberlin Joan Robinson

1930

Characteristics

• Perfect substitutes• Size, taste, shape• Branding• Advertisement• Promotions

Product Differentiation• Many firms• Stiff competition• CD, Games , computers

Many Sellers or FirmsENTRY EXIT

• Flexibility• Entry & Exit

Free Entry and Free Exit• layoffs, discounts, credit

facilities

No price Competition• Less knowledge• Artificial impression• Non optimal evaluation

Lack of perfect knowledge

In the Short RunSo what happens in the short run when the firm is making profits:

• New firms• Increased products• Reduces demand in the

market.• Demand curves shift to the

left.• profits decline.

In the Short Run

Quantity0

Price

Q

P

AR

MR

ATC

(a) Firm Makes Profit

Averagetotal cost

Profit

MC

In the Short RunSo what happens in the short run when the firm is making losses:

• Exiting markets• Less products • Demand increases• Demand curve shifts

right• Increases profits

In the Short Run

AR

Quantity0

Price

P

Q

Averagetotal cost

(b) Firm Makes Losses

MR

LossesATC

MC

In the Long RunSo what happens in the long run:

• Firms will enter and exit until the firms are making exactly zero economic profits.

Price = Average Total Cost

In the Long Run

Quantity

Price

0

ARMR

ATC

MC

Q

P = ATC

Monopolistic Competition: Welfare of Society

• Deadweight loss• Too much or Too little

entry

Amount produced

Price

P

Q

ATC

MC=S

MR

D

PROFIT

Deadweight loss

Monopolistic Competition: Welfare of Society

Externalities of entry:

• The product-variety Externality

• The business-stealing Externality

Advertising

• Advertisement to attract more buyers• 10-20% revenue on advertising• 2% of revenue on advertising

• Critics• To Manipulate tastes• More different products

Advertising

• Defenders• Information to consumers• Provides great variety of products• Good quality products

Case Study: McDonalds

Competition to McDonald’s

Kentucky's Fried Chicken (KFC)

Burger King Starbucks

Competitive techniques

Competitive techniques

• Remodeling of stores• Replacement of chairs and

glasses• New interior design

Non price competition

• 31000 restaurants and in 119 countries

• Large Dining Areas• Zones for larger groups,  eat-and-run

customers, and for those who stay there to rest.

• Flat Screen TVs• Drive through in inside and outside the

restaurants

External competition

Case Study: Apple

• Founded on April 1, 1976• Makers of IPhone, IPad and Ipods• Largest Information technology company by

revenue

Competitors

Differentiated Products

iPhoneiPod

Macbook air

Macintosh iPad

Differentiated Products

• Innovative Products• Differentiated on the basis of its attributes• Quality products

Differentiated Products

Thank You