Upload
others
View
1
Download
0
Embed Size (px)
Citation preview
WhatisMonopolisticCompetition?
Thinkofa‘reallifeversion’ofperfectcompetition
- Perfect Imperfect Information
- Unlimited Large numberofbuyers(consumers)andsellers(firms)
- Homogeneous(Same)Goods Differentiated Goods
- Pricetakingfirms(butcansettheirownprices,nottheindustry)
- No Low barrierstoentryorexit
- Branding,advertisingandproductdevelopmentisimportant
MarketStructures&Competition
More competitive
Less competitive
Perfectcompetition
Monopolisticcompetition
Oligopoly
Monopoly
RevenuesUnderMonopolisticCompetition
Undermonopolisticcompetition,therearemoresubstitutesthaninamonopolybutlesssubstitutesthaninperfectcompetitionduetoproductdifferentiation.Therefore,thedemandcurveismoreelasticthanthatofamonopolybutlesselasticthanperfectcompetition.
D=AR
Output0
Price/Revenue
MR
RevenuesUnderMonopolisticCompetition
Firmshavesomedegreeofmonopolypower,cansettheirownpricesandhencethedemandwillbedownwardsloping.Morewillbeboughtandproducedwhenpricechargedperunitislow,andviceversa.
D=AR
Output0
Price/Revenue
MR
MonopolisticCompetitionShortRunDiagram
Intheshortrun,themonopolisticcompetitiondiagramwillbesimilartothemonopolydiagram.
FirmscanmaximizeprofitsattheoutputofMC=MR.Whichassumptionallowsthemtodothis?
ARMR
Price
OutputQ10
MC
AC
ARMR
C1
P1
MonopolisticCompetitionShortRunDiagram
Byhavingdifferentiatedgoods,theywillbeabletoactlikeamonopolytosomedegreeandmakeabnormalprofitsintheshortrun.
ARMR
Price
OutputQ10
MC
AC
ARMR
C1
P1
MonopolisticCompetitionShortRunDiagram
Whatdoyouthinkwillhappentoprofitsinthelongrun?
Whatabouttheelasticityofdemand/revenueandcosts?
ARMR
Price
OutputQ10
MC
AC
ARMR
C1
P1
MonopolisticCompetitionLongRunDiagram
Inthelongrunwhereallfactorsofproductionarevariable(nofixedfactors),newfirmswillbeabletoenterthemarket(lowbarriers).
Hence,therewillbemoresubstitutesanddemand(averagerevenue)willbemoreelastic.Averagecostsarealsolikelytobehigherasfirmsproducealoweramountofoutputduetohighercompetitionintheindustry. AR
MR
Price
Output0
MC
AC
MonopolisticCompetitionLongRunDiagram
ARMR
Price
Output0
MC
AC
Asaresultofthedemandandcostchanges,firmswillonlyearnnormalprofitsinthelongrun.Theabnormalprofitsintheshortrunwillbecompetedawaygiventheincreaseinindustrysupply.
NotethatduetotheincreaseinthePED,theACcurvewillbetangenttotheARatthepointwherethefirmsmaximizeprofits.
P1=C1
EvaluatingMonopolisticCompetition
Towhatextentdoesmonopolisticcompetitionbenefitconsumers?
- Differentiatedgoodsallowforchoiceofconsumers
- Productdifferentiationrequiresaneedforproductdevelopment,andfirmsinthemarketcanafforditwithshorttermsupernormalprofits
- Effectdependsonthesize/numberoffirmsandrateofproductdifferentiation
EvaluatingMonopolisticCompetition
Howmuchdoesthetheoryapplyinreallife?
- Notasextremeastheperfectcompetitionmodelandrelatabletoreallife
- Somethingstothinkabout:◦ Howlongisthelong run?Consumer tastesareever-changingandnewsubstitutesmaynotenterthemarketfastenough.
◦ Willfirmscontinuetocompetebyproductdifferentiationwhenmoresubstitutesareavailable?Howwillthemarketchange?