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Monopolistic Competition

Monopolistic Competition. MONOPOLISTIC COMPETITION. Aims of lecture To identify the meaning of monopolistic competition and distinguish it from other market structures

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Monopolistic Competition

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  1. Monopolistic Competition

  2. MONOPOLISTIC COMPETITION • Aims of lecture • To identify the meaning of monopolistic competition and distinguish it from other market structures • To demonstrate the profit-maximising price, output and profit for a firm under monopolistic competition in:a) the short runb) the long run • To examine the social implications of monopolistic competition

  3. MONOPOLISTIC COMPETITION • Market structures • Perfect competition • Monopolistic competition • Oligopoly • Monopoly

  4. MONOPOLISTIC COMPETITION • Imperfect competition • Two definitions • Any industry where firms are not price takers • This includes pure monopoly • Any industry where firms are not price takers but face competition from other firms • This excludes pure monopoly • Monopolistic competition • Free entry • Oligopoly • Restricted entry

  5. Features of the four market structures

  6. Small and Medium Sized Enterprises (SMEs) SMEs: under 250 employees Large enterprises: 250+ employees Turnover No. of firms Employment Source: SME Statistics UK, DTI

  7. MONOPOLISTIC COMPETITION • Assumptions of monopolistic competition • Large number of firms • Freedom of entry • Differentiated products • Downward-sloping demand curve • Each firm has some power over prices • Equilibrium of the firm • short run MR = MC

  8. Short-run equilibrium of the firmunder monopolistic competition MC AC AR =D MR £ O Q

  9. MONOPOLISTIC COMPETITION • Equilibrium of the firm • long run • If economic (supernormal) profits are made, new firms will be attracted into the industry • Long-run equilibrium where:MR = MC (profit maximisation)AR = AC (no economic profits: just normal profit)

  10. Long-run equilibrium of the firmunder monopolistic competition LRMC LRAC ARS=DS MRS £ O Q

  11. MONOPOLISTIC COMPETITION • Assumptions of monopolistic competition • Equilibrium of the firm • short run MR = MC • long run MR = MC; AR = AC • under-utilisation of capacity in long run

  12. Under-utilisation of capacity in the long run £ LRAC DLunder monopolistic competition O Q

  13. MONOPOLISTIC COMPETITION • The public interest • comparison with perfect competition

  14. Long run equilibrium of the firm under perfect andmonopolistic competition £ • Production not at minimum AC • Price not equal to MC • Costs of product differentiation LRAC P1 DLunder monopolistic competition O Q1 Q

  15. MONOPOLISTIC COMPETITION • E-Commerce: a case study • Low entry costs • reduced capital and marketing costs • outsourcing • Near perfect knowledge • greater price transparency • greater information on product availability • Reduction in firms’ power over prices • greater competition (often global) • ease for consumers to ‘shop around’ • firms more flexible in sourcing their supplies

  16. MONOPOLISTIC COMPETITION • E-Commerce: a case study (cont.) • Constant striving by firms to reduce competition • firms seeking to differentiate their product: ‘rent seeking’ • mergers and acquisitions • first-mover advantage

  17. MONOPOLISTIC COMPETITION • The public interest • comparison with perfect competition • comparison with monopoly • no long-term economic profits • possibly lower price • BUT lack of economies of scale and less to plough back into investment • choice for consumer • competition may improve quality and/or reduce costs

  18. MONOPOLISTIC COMPETITION • Limitations of the model • imperfect information • difficulty in identifying industry demand curve • entry may not be totally free • Indivisibilities: may allow economic profits even in long run • importance of non-price competition

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