Transcript Monopolistic Competition

Monopolistic Competition and
Oligopoly
Chapter 11
Introduction
• Market structure is the focus real-world
competition.
• Market structure refers to the physical
characteristics of the market within which
firms interact.
• How do firms and people buy and sell?
Introduction
• Market structure involves the number of firms
in the market and the barriers to entry.
Introduction
• Perfect competition, with an infinite
number of firms, and monopoly, with a
single firm, are polar opposites.
• Monopolistic competition lie between
these two extremes.
• Keiretsu – business network
Introduction
• Monopolistic competition is a market
structure in which there are many firms
selling differentiated products.
• There are few barriers to entry.
11.1 Characteristics of Monopolistic
Competition
Four distinguishing characteristics:
1. Many sellers that do not take into account rivals’
reactions – each firm has a small share of the market
2. Lack of Collusion with so many firms it’s hard to get
together and collude
3. Independence because of so many firms, each one
acts independently. No firm takes into account the
actions of other firms.
Product Differentiation
• Product differentiation implies that the
products are different enough that the
producing firms exercise a “mini-monopoly”
over their product.
• The firms compete more on product
differentiation than on price.
• Entering firms produce close substitutes, not
an identical or standardized product.
Short Run and Long Run in Monopolistic
Competition
Single Monopolistically
Competitive Firm
Single Monoply Firm
Profit
P
P
MC
MC
A
P = ATC
Pm
MCM
A
ATC
ATC
D,P
MR
QM
MR
Q
QM
D=P
Q
11.2 Short-Run, Output, Price, and Profit of
a Monopolistic Competitor
• Like a monopoly,
• The monopolistic competitive firm has some
monopoly power so the firm faces a downward
sloping demand curve
• Marginal revenue is below price
• At profit maximizing output, marginal cost
will be less than price
• Like a perfect competitor, zero economic profits exist in
the long run
A Monopolistically
Competitive Firm: Above Normal Profit
A Monopolistically
Competitive Firm: Economic Loss
A Monopolistically
Competitive Firm: Normal Profit
Entry and Normal Profit
Comparing Perfect and
Monopolistic Competition
• Both the monopolistic competitor and the
perfect competitor make zero economic profit
in the long run.
11.3 Long-Run Equilibrium in
Monopolistic Long Run
• It is possible for the monopolist to make
economic profit in the long-run.
• No long-run economic profit is possible in
monopolistic competition due to easy entry
and differentiated products.
Perfect Competition and
Monopolistic Competition Compared
Monopolistic Competition Compared
with Perfect Competition Graph
P
MC
ATC
PMC
PPC
DPC
DMC
MRMC
QMC QPC
Q
• In monopolistic competition
in the long run, P > ATCmin
• In perfect competition in the
long run, P = ATCmin
Outcome:
Monopolistic competition
output is lower and
price is higher than
perfect competition
Monopolistic Competition Compared
with Perfect Competition Graph
P
MC
ATC
PMC
PPC
DPC
DMC
MRMC
QMC QPC
Q
• In monopolistic competition
in the long run, P > min ATC,
Outcome:
Monopolistic competition
output is lower (excess
capacity) and
price is higher than
perfect competition