monopolistic ally

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y Monopolistic competition is a form of imperfectcompetition where many competing producers sell

products that are differentiated from one another (thatis, the products are substitutes , but, with differencessuch as branding, are not exactly alike).

y In monopolistic competition firms can behave like

monopolies in the short-run , including using marketpower to generate profit.



y In the long-run , other firms enter the market and thebenefits of differentiation decrease with competition.

y The market becomes more like perfect competition where firms cannot gain economic profit.



y M onopolistically competitive markets have thefollowing characteristics:

y There are many producers and many consumers in agiven market, and no business has total control overthe market price.

y Consumers perceive that there are non-price

differences among the competitors' products.y There are few barriers to entry and exit.y Producers have a degree of control over price.



y A firm making profits in the short run will break evenin the long run because demand will decrease andaverage total cost will increase.

y This means in the long run, a monopolistically competitive firm will make zero economic profit .

y This gives the amount of influence over the market;because of brand loyalty, it can raise its prices withoutlosing all of its customers.

y . This means that an individual firm's demand curve isdownward sloping, in contrast to perfect competition, which has a perfectly elastic demand schedule.



y Major characteristicsy There are six characteristics of monopolistic

competition ( M C):y product differentiationy many firmsy free entry and exit in long runy Independent decision makingy M arket Powery Buyers and Sellers have perfect information



y P roduct differentiationy M C firms sell products that have real or perceived non-

price differences. However, the differences are not sogreat as to eliminate goods as substitutes. Technically the cross price elasticity of demand between goods would be positive.

y Many firmsy There are many firms in each M C product group and

many firms on the side lines prepared to enter themarket. A product group is a "collection of similarproducts



y E ach M C firm independently sets the terms of exchange for its product.

y The firm gives no consideration to what effect itsdecision may have on competitors.



y Market powery M C firms have some degree of market power. M arket

power means that the firm has control over the termsand conditions of exchange.y A n M C firm can raise it prices without losing all its

customers.y I nefficiency y There are two sources of inefficiency in the M C market

structure. First, at its optimum output the firm chargesa price that exceeds marginal costs, The M C firmmaximizes profits where MR = M C.



y W hile monopolistically competitive firms areinefficient, it is usually the case that the costs of

regulating prices for every product that is sold inmonopolistic competition by far exceed the benefitsy The government would have to regulate all firms that

sold heterogeneous products an impossible

proposition in a market economy



y A monopolistically competitive firm might be said tobe marginally inefficient because the firm produces at

an output where average total cost is not a minimum.y A monopolistically competitive market might be said

to be a marginally inefficient market structure becausemarginal cost is less than price in the long run. [



y Ex amplesy In many U.S. markets, producers practice product

differentiation by altering the physical composition,using special packaging, or simply claiming to havesuperior products based on brand images and/oradvertising.

y

Toothpastes and toilet papers are examples of differentiated products.



BIBILOGRAPHYy M onopolistic Competition. E ncyclopedia Britannica.

http://www.britannica.com/ E Bchecked/topic/390037/monopolistic-competition

y Joshua Gans , Stephen King, R obin Stonecash, N. Gregory M ankiw(2003). Principles of Economics . Thomson Learning. ISBN 0-17-011441-4.Goodwin, N, Nelson, J; A ckerman, F & W eissskopf, T: M icroeconomicsin Context 2d ed. page 317 Sharpe 2009

y ^ Hirschey, M , M anagerial E conomics R ev. E d, page 443. Dryden 2000.y ^ a b Krugman & W ells: M icroeconomics 2d ed. W orth 2009.y ^ Samuelson, W & M arks, S: 379. M anagerial E conomics 4th ed. W iley 2003.y ^ Perloff, J: M icroeconomics Theory & A pplications with Calculus page

485. Pearson 2008



y Colander, David C. M icroeconomics 7th ed. Page 283. M cGraw-Hill 2008.y Colander, David C. M icroeconomics 7th ed. Page 283. M cGraw-Hill 2008.y Perloff, J: M icroeconomics Theory & A pplications with Calculus page 483

Pearson 2008.y Goodwin, N, Nelson, J; A ckerman, F & W eissskopf, T: M icroeconomics inContext 2d ed. page 289. Sharpe 2009y A yers, R & Collinge, R : M icroeconomics pages 224-25 Pearson 2003y Perloff, J: M icroeconomics Theory & A pplications with Calculus page 445.

Pearson 2008.y A yers, R & Collinge, R : M icroeconomics page 280 Pearson 2003y Pindyck, R & R ubinfeld, D: M icroeconomics 5th ed. page 424 Prentice-Hall

2001.y Pindyck, R & R ubinfeld, D: M icroeconomics 5th ed. page 425 Prentice-Hall

2001.y Pindyck, R & R ubinfeld, D: M icroeconomics 5th ed. page 427 Prentice-Hall

2001.



y The firm has not reached full capacity or minimumefficient scale . M inimum efficient scale is the level of production at which the long run average cost curvefirst reaches its minimum. It is the point where theLRA TC curve "begins to bottom out." Perloff, J:M icroeconomics Theory & A pplications with Calculuspages 483-84. Pearson 2008.

y

A ntony Davies & Thomas Cline (2005). " A ConsumerBehavior A pproach to M odeling M onopolisticCompetition". J ournal of Economic Psychology 26 :797 826. doi:10.1016/j.joep.2005.05.003

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