monopolistic competition. monopolistic competition occurs if many firms serve a market with free...
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Monopolistic Monopolistic CompetitionCompetition
Monopolistic Competition
Monopolistic competition occurs if many firms serve a market with free entry and exit, but in which one firm’s products are not perfect substitutes for the products of other firms.
Assumptions of monopolistic competition large number of firms
freedom of entry
differentiated product (product differentiation)
Chamberlain – SELLING COST
downward-sloping demand curve
Monopolistic Competition
Monopolistic Competition Selling Cost Demand is not determined by price
alone Style, services, Selling activities Shift in demand due to these factors
U Shaped Product Differentiation
Real (inherent characteristics different) and Fancied (product is same; consumer is
persuaded) Firm is NOT a price taker but the price
determination is limited
Monopolistic Competition
Industry and Product Group Industry: Same products Product Group: Closely related products High price and cross elasticities
Short run equilibrium of the firmRs
Q O
AC
MR
AR D
Ps
Qs
MC
Short run equilibrium of the firmRs
Q O
AC
MR
AR D
Ps
Qs
MC
ACs
Short run equilibrium of the firmRs
Q O
AC
MR
AR D
Ps
Qs
MC
ACs
Monopolistic Competition
Assumptions of monopolistic competition large number of firms
freedom of entry
differentiated product
downward-sloping demand curve
Equilibrium of the firm short run
long run
Long run equilibrium of the firmRs
Q O
LRAC
MRL
ARL DL
PL
QL
LRMC
Qs
Ps
SAR
SMR
Monopolistic Competition
Assumptions of monopolistic competition large number of firms freedom of entry differentiated product downward-sloping demand curve
Equilibrium of the firm short run long run underutilization of capacity in long run
Excess capacity in the long runRs
Q O
LRAC
MRL
ARL DL
PL
QL
LRMC
ab
Limitations of the model imperfect information difficulty in identifying industry demand
curve entry may not be totally free indivisibilities importance of non-price competition
Comparing monopolistic competition with perfect competition and monopoly comparison with perfect competition
Monopolistic Competition
Monopolistic Competition
‘Group’ Equilibrium Product group
Technical substitutability Economic substitutability
Within group each firm has its own demand curve
Slight product differentiation
Long run equilibrium of the firmRs
QO
P1
LRAC
DL under perfect
competition
Q1
Long run equilibrium of the firm perfect andmonopolistic competitionRs
QO
P2
P1
LRAC
DL under perfect
competition
DL under monopolistic
competition
Q2 Q1
Identifying Monopolistic Competition
Two indexes: The four-firm concentration ratio The Herfindahl-Hirschman Index
The four-firm concentration ratio
The percentage of the value of sales accounted for by the four largest firms in the industry.
The range of concentration ratio is from almost zero for perfect competition to 100 percent for monopoly.oA ratio that exceeds 40 percent: indication of oligopoly.
oA ratio of less than 40 percent: indication of monopolistic competition.
The Herfindahl-Hirschman Index (HHI)
The square of the percentage market share of each firm summed over the largest 50 firms in a market.
Example, four firms with market shares as 50 percent, 25 percent, 15 percent, and 10 percent.
HHI = 502 + 252 + 152 + 102 = 3,450 A market with an HHI less than
1,000 is regarded as competitive. An HHI between 1,000 and 1,800 is
moderately competitive.
Limitations of Concentration Measures
The two main limitations of concentration measures alone as determinants of market structure are their failure to take proper account ofoThe geographical scope of a market
oBarriers to entry and firm turnover
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