28501861 Monopolistic Competition for Students

8/8/2019 28501861 Monopolistic Competition for Students

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MonopolisticCompetition

Submitted by: Faisal Mohd. Khan

IM-2K8-26


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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



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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


Long-run equilibrium of the firm


QO

LRAC

LRMC

ARS ! DS

MRS


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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



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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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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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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



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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


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28501861 Monopolistic Competition for Students