7/31/2019 Monopolistic Competition Ready

1/15

MONOPOLISTIC COMPETITION

7/31/2019 Monopolistic Competition Ready

2/15

Monopolistic Competition

Where the conditions of perfect competitiondo not hold, imperfect competition will exist

Varying degrees of imperfection give rise to

varying market structures Monopolistic competition is one of these

not to be confused with monopoly!

7/31/2019 Monopolistic Competition Ready

3/15

FEATURES OF MONOPOLISTIC

COMPETITION

Large number of firms in the industry May have some element of control over price due to

the fact that they are able to differentiate their product

in some way from their rivals products are thereforeclose, but not perfect, substitutes

Entry and exit from the industry is relatively easy few barriers to entry and exit

Consumer and producer knowledge imperfect

7/31/2019 Monopolistic Competition Ready

4/15

Characteristics of Monopolistic

Competition

Product Differentiation Each firm makes a productthat is slightly different from the products ofcompeting firms.

-- Close substitutes but no perfect substitutes

-- An attempt to increase price will normally resultsin a lower volume sold

Competition on Quality, Price, Marketing

-- Quality is design, reliability, service provided tobuyer and ease of access to product

-- Price downward sloping demand curve-- Marketing firm must market = promotion,distribution, packaging

7/31/2019 Monopolistic Competition Ready

5/15

Product Differentiation

Product differentiation is crucial to monopolistic competition

People value variety, even if it is not material (real)

Product differentiation takes place in buyers mind

INDIANS are provided with a wide variety of products andservices

Variety is valued but costly we pay for it

7/31/2019 Monopolistic Competition Ready

6/15

Basis for Product Differentiation

Physical differences

Convenience

Ambience

Reputations Appeals to vanity

Unconscious fears and desires

Snob appeal

Customized products

7/31/2019 Monopolistic Competition Ready

7/15

EQUILIBRIUM UNDER MONOPOLISTIC

COMPETITION

Since the Monopolistic Competitor prices at demandwhere MR=MC, the firm may have

1. excess production capacity, and is2. operating below its efficient scale where ATC is

minimum

7/31/2019 Monopolistic Competition Ready

8/15

p

QO Qs

AR= D

MC

AC

MR

Short-run equilibrium - profitShort-run equilibrium - profit

Ps

ACs

7/31/2019 Monopolistic Competition Ready

9/15

SHORT RUN EQUILIBRIUM - LOSS

7/31/2019 Monopolistic Competition Ready

10/15

Short run equilibrium of the firmShort run equilibrium of the firm

MR

R & C

QO QL

P

LRAC

LRMC

AR

7/31/2019 Monopolistic Competition Ready

11/15

Long Run: Zero Economic Profit

Economic profit induces entry and economicloss induces exit, as in perfect competition.

Entry decreases the demand for the product ofeach firm.

Exit increases the demand for the product ofeach firm.

In the long run, economic profit is competed

away and firms earn normal profit..

LONG RUN EQUILIBRIUM

7/31/2019 Monopolistic Competition Ready

12/15

Long-run equilibrium of the firmLong-run equilibrium of the firm

AR= D

MR

R & C

QO QL

P

LRAC

LRMC

7/31/2019 Monopolistic Competition Ready

13/15

Advertising and Branding

Whats to be gained by pouring money into advertising? Itworks!

-- Continuous signals regarding productdifferentiation

-- coca-cola vs pepsi

Advertising can affect the level of demand and priceelasticity of demand it is an alternative to price reductionas a means of selling more increasing profits . As a result ofadvertising each firm will produces more and this will

reduces excess capacity in its industry

Brand has tremendous value

-- Brands tend to capture in a single name all the

values a firm wants to impress upon the buyer

7/31/2019 Monopolistic Competition Ready

14/15

IMPACT OF ADVERTISING

COST

OUTPUTO

AC1

AC2

Average cost = production cost + selling cost

output

7/31/2019 Monopolistic Competition Ready

15/15

THANK YOU