1、Monopolistic Competition,1, 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.,Monopolistic
2、Competition,Imperfect competitionBetween perfect competition and monopolyOligopolyMonopolistic competitionOligopolyFew sellers selling similar or identical productsConsider the rivals behavior in decision making,2, 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated
3、, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.,Monopolistic Competition,Monopolistic competitionMany sellersProduct differentiationDifferentiated products, but close substit
4、utesNot price takers (market power- limited)Downward sloping demand curveFree entry and exitZero economic profit in the long run,3, 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a
5、certain product or service or otherwise on a password-protected website for classroom use.,Figure 1,4, 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or
6、 otherwise on a password-protected website for classroom use.,The Four Types of Market Structure,Economists who study industrial organization divide markets into four typesmonopoly, oligopoly, monopolistic competition, and perfect competition.,Short Run Equilibrium,Profit maximizationProduce the qua
7、ntity where marginal revenue = marginal costPrice: on the demand curveIf P ATC: profitIf P MC),9, 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or othe
8、rwise on a password-protected website for classroom use.,Long Run Equilibrium,Monopolistic vs. perfect competition Monopolistic competitionQuantity: not at minimum ATCExcess capacity (not “efficient scale”)P MC, markup over marginal costEager to attract additional customerPerfect competitionQuantity
9、: at minimum ATCEfficient scaleP = MC,10, 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
10、,Figure 4,11, 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.,Monopolistic versus Perfect
11、 Competition,Panel (a) shows the long-run equilibrium in a monopolistically competitive market, and panel (b) shows the long-run equilibrium in a perfectly competitive market. Two differences are notable. (1) The perfectly competitive firm produces at the efficient scale, where average total cost is
12、 minimized. By contrast, the monopolistically competitive firm produces at less than the efficient scale. (2) Price equals marginal cost under perfect competition, but price is above marginal cost under monopolistic competition.,(a) Monopolistically Competitive Firm,MC,Quantityproduced,MC,(b) Perfec
13、tly Competitive Firm,MR,Demand,Price,Efficientscale,MC,Quantity produced = Efficient scale,Welfare of Society,Sources of inefficiency (social welfare)Excess capacity Produce below the “efficient scale” (LR) Price over marginal costDeadweight loss of monopoly pricingToo much or too little entryProduc
14、t-variety externalityPositive externality on consumersBusiness-stealing externalityNegative externality on producers,12, 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain pro
15、duct or service or otherwise on a password-protected website for classroom use.,Advertising,Incentive to advertiseWhen firms sell differentiated products and charge prices above marginal costAdvertise to attract more buyersAdvertising spendingHighly differentiated goods: 10-20% of revenueHomogenous
16、products: No advertisingIndustrial products: Little advertising,13, 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected
17、website for classroom use.,Advertising,Debate over advertisingwasting resources? vs. valuable purpose? The critique of advertisingFirms advertise to manipulate peoples tastesPsychological rather than informationalCreates a desire that otherwise might not existIncrease perception of product different
18、iationFoster brand loyaltyMakes buyers less concerned with price differences among similar goodsImpedes competition,14, 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain prod
19、uct or service or otherwise on a password-protected website for classroom use.,Advertising,The defense of advertisingProvide information to customersCustomers - make better choicesEnhances the ability of markets to allocate resources efficientlyFosters competitionCustomers - take advantage of price
20、differencesAllows new firms to enter more easily,15, 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for cla
21、ssroom use.,Advertising and the price of eyeglasses,What effect does advertising have on the price of a good? Conflicting hypothesisConsumers view products as more different than they otherwise wouldMarkets less competitiveFirms demand curves less elasticHigher pricesConsumers easier to find firms w
22、ith the best pricesMarkets more competitiveFirms demand curves more elasticLower prices,16, 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise
23、on a password-protected website for classroom use.,Advertising and the price of eyeglasses,1963, Test: advertising by optometristsStates that prohibited advertisingAverage price paid for a pair of eyeglasses = $33States that did not restrict advertisingAverage price = $26Finding: AdvertisingReduced
24、average prices, fostering competition,17, 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
25、,Advertising,Advertising - a signal of quality Advertisement a signal of qualityWillingness to spend large amount of money is a signal about quality of the productContent of advertising = irrelevantBrand namesSpend more on advertising, charging higher pricesCritics of brand names: Irrational Consume
26、rs are willing to pay more for brand namesDefenders of brand namesConsumers information about qualityFirms incentive to maintain high quality,18, 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distr
27、ibuted with a certain product or service or otherwise on a password-protected website for classroom use.,Table 1,19, 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.,Monopolistic Competition: Between Perfect Competition and Monopoly,
