Upload
maryann-lucas
View
224
Download
2
Embed Size (px)
Citation preview
Monopolistic Competition (m.c.)
large number of independent sellers no or low barriers to entry differentiated product
differentiated products
products that are distinguished from similar products by such characteristics as quality, design, and location.
examples: service stations, aspirin, tissues, retail stores
Demand Curve for the Monopolistic Competitor’s Product
Since the product is differentiated, there is some brand loyalty and the firm has some control over price.
Since there are good substitutes available, however, the demand curve is fairly elastic.
The demand curve for the monopolistic competitor’s product is flatter than the demand curve for the monopolist’s product, but not horizontal like the demand curve for the perfect competitor’s product.
p.c. m.c. monopoly
DD D
P P P
Q Q Q
Apart from the fact that the demand curve for the monopolistic competitor’s product is technically flatter than the demand curve for the monopolist’s product, the graphs look essentially the same.
Profit-maximizing output: where MR = MC (directly below the tangency of D and ATC)
ATCMC
MR D
$
quantityQ*
Possibilities for the Monopolistic Competitor
short run: positive profits, losses, or breaking even.
long run: breaking even.
Similarities between perfect competition and monopolistic competition
Profits must be zero in long run equilibrium. Firms are responsive to changes in demand
conditions. Competition in the pursuit of profit encourages
resource movements that are efficient.
Differences between perfect competition and monopolistic competition
In long run equilibrium, the perfectly competitive firm is at the minimum of the ATC curve. The monopolistically competitive firm is not.
For perfectly competitive firms, P = MC. For monopolistically competitive firms, P > MC.
Perfectly competitive firms don’t advertise because everyone knows the products are all the same. Monopolistic competitors advertise to convince consumers that their product is better than others.
Price Discrimination
when a seller charges different prices to different consumers for the same product or service.
Examples
Charging different prices for movie admission to students and senior citizens and to other customers is price discrimination.
Charging different prices for movie admission on a Wednesday afternoon and on a Saturday night is not price discrimination because the products are not the same.
Requirements for Price Discrimination to Occur
Firm must have some control over price. (So perfect competitors can not price discriminate, but monopolistic competitors, monopolists, and oligopolists can.)
Firm must be able to separate consumers into different identifiable groups.
The different groups must have different elasticities.