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8/8/2019 28501861 Monopolistic Competition for Students
1/14
MonopolisticCompetition
Submitted by: Faisal Mohd. Khan
IM-2K8-26
8/8/2019 28501861 Monopolistic Competition for Students
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Imperfect competition Two definitions
Any industry where firms are not price takers
This includes pure monopoly
Any industry where firms are not price takers but
face competition from other firms
This excludes pure monopoly
Monopolistic competition Free entry
Oligopoly
Restricted entry
MONOPOLISTIC COMPETITIONMONOPOLISTIC COMPETITION
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MONOPOLISTIC COMPETITION
Assumptions of monopolistic competition Large number of firms
Freedom of entry
Differentiated products Downward-sloping demand curve
Each firm has some power over prices
Equilibrium of the firm short run
MR = MC
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QO
AR! D
MC
AC
MR
Short-run equilibrium of the firm
under monopolistic competition
Short-run equilibrium of the firm
under monopolistic competition
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MONOPOLISTIC COMPETITION
Equilibrium of the firm
long run
If economic (supernormal) profits are made, new
firms will be attracted into the industry
Long-run equilibrium where:
MR = MC(profit maximisation)
AR = AC(no economic profits: just normal profit)
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Long-run equilibrium of the firm
under monopolistic competition
Long-run equilibrium of the firm
under monopolistic competition
QO
LRAC
LRMC
ARS ! DS
MRS
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MONOPOLISTIC COMPETITION
Assumptions of monopolistic competition
Equilibrium of the firm
short run
MR = MC
long run
MR = MC; AR = AC
under-utilisation of capacity in long run
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Under-utilisation of capacity in the long runUnder-utilisation of capacity in the long run
QO
LRAC
DL under monopolistic
competition
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The public interest comparison with perfect competition
MONOPOLISTIC COMPETITIONMONOPOLISTIC COMPETITION
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Long run equilibrium of the firm under perfect and
monopolistic competition
Long run equilibrium of the firm under perfect and
monopolistic competition
Production not at minimumAC Price not equal to MC
Costs of product differentiation
QO
P1
LRAC
DL under monopolistic
competition
Q1
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MONOPOLISTIC COMPETITION
E-Commerce: a case study Low entry costs
reduced capital and marketing costs
outsourcing Near perfect knowledge
greater price transparency
greater information on product availability
Reduction in firms power over prices
greater competition (often global)
ease for consumers to shop around
firms more flexible in sourcing their supplies
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MONOPOLISTIC COMPETITION
E-Commerce: a case study (cont.)
Constant striving by firms to reduce
competition
firms seeking to differentiate their product:
rent seeking
mergers and acquisitions
first-mover advantage
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The public interest
comparison with perfect competition
comparison with monopoly
no long-term economic profits
possibly lower price
BUT lack of economies of scale and less to plough backinto investment
choice for consumer
competition may improve quality and/or reduce costs
MONOPOLISTIC COMPETITIONMONOPOLISTIC COMPETITION
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Limitations of the model
imperfect information
difficulty in identifying industrydemand curve
entry may not be totallyfree
Indivisibilities: may allow economic profits
even in long run
importance of non-price competition
MONOPOLISTIC COMPETITIONMONOPOLISTIC COMPETITION
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