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What did you study last time?

What did you study last time?. why monopolies arise? what is meant by a monopoly? how much output a monopoly should produce to maximize profit? if monopolies are good or bad? how governments regulate monopolies? how a monopoly price discriminates?. 10/9/2014. CRC Microeconomics. 2.

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What did you study last time?

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  1. CRC Microeconomics

  2. What did you study last time? why monopolies arise? what is meant by a monopoly? how much output a monopoly should produce to maximize profit? if monopolies are good or bad? how governments regulate monopolies? how a monopoly price discriminates? 10/9/2014 CRC Microeconomics 2

  3. Do you know … • what is meant by monopolistic competition? • the special features of monopolistic competition? CRC Microeconomics

  4. 1a. Monopolistic competition—Main characteristics A market • with many sellers (firms); • with similar (slightly different) products; • where firms can enter or exit without restrictions. CRC Microeconomics

  5. 1b. Monopolistic competition—Main ideas • A monopolistically competitive firm faces a downward-sloping demand curve. • The firm chooses its quantity Qmc and price Pmc just as a monopoly does. • The firm maximizes profits by producing output Qmc where MR = MC. CRC Microeconomics

  6. 1b. Monopolistic competition— Main ideas • SR market profits encourage new firms to enter the market. • SR market losses force existing firms to exit the market. • Firms will enter and exit the market until they are making zero profits. • The firm’s LR profits are zero, i.e. P = ATC. CRC Microeconomics

  7. 1b. Monopolistic competition— Main ideas • In the LR, there exists an excess capacity, because Qmc < Q (at minimum ATC). • In the LR, there also exists a markup over MC, i.e. P > MC. CRC Microeconomics

  8. 1b. Monopolistic competition— Main ideas • Monopolistic competition is inefficient because: - there is a DWL, as reflected by the markup, and - the number of firms may not be “ideal”, i.e. there may be too much or too little entry. CRC Microeconomics

  9. 1b. Monopolistic competition— Main ideas • An entry of a new firm into the industry causes two effects: - Product-variety externality:consumer surplus increases (a positive externality) - Business-stealing externality: existing firms lose customers and profits (a negative externality) CRC Microeconomics

  10. A monopolistically competitive firm in the LR P Markup Excess capacity MC MR ATC Pmc = ATC Pmc > MC AR Qmc Qc Q In the LR, a monopolistically competitive firm makes zero profits, CRC Microeconomics charges a price with a markup over MC, and has an excess capacity.

  11. Monopolistic vs. Perfect Competition The diagrams below show two firms with the same costs. In the LR, the competitive firm produces Qc at minimum ATC. For the competitive firm, (P = AR) = MR = MC. Monopolistically competitive firm Perfectly competitive firm P P MC MC ATC ATC P=MC AR=MR Q Q Qc CRC Microeconomics

  12. Monopolistic vs. Perfect Competition For the monopolistically competitive firm, (P = AR) > MR = MC. The firm produces Qmc < Qc, charges Pmc > MC with a markup. There exists an excess capacity, Qc – Qmc. Monopolistically competitive firm Perfectly competitive firm P P Markup MC MC ATC ATC Pmc P=MC AR=MR MC AR MR Q Q Qmc Qc Qc CRC Microeconomics Excess capacity

  13. 2. Special features of monopolistic competition • Monopolistically competitive firms have the incentive to advertise to attract more buyers to their particular products. CRC Microeconomics

  14. 2. Special features of monopolistic competition • The amount of advertising varies substantially across products. Products % of revenue spenton advertising Highly differentiated consumerproducts, e.g. soft drinks, etc. 10% to 20% Industrial products. e.g. satellites very little Homogenous (identical) consumerproducts, e.g. wheat, peanuts, etc. 0% CRC Microeconomics

  15. 2. Special features of monopolistic competition The debate over advertising The critique The defense Firms use advertising tomanipulate people’s tastes. Firms use advertising toprovide information tocustomers. Advertising impedescompetition. Advertising fosterscompetition. CRC Microeconomics

  16. 2. Special features of monopolistic competition • Advertising is a sign of quality. - The willingness of a firm to spend a large amount of money on advertising can itself be a signal to consumers about the quality of the product being offered. - The content of the advertisement is irrelevant. CRC Microeconomics

  17. 2. Special features of monopolistic competition Arguments about brand names The critique The defense They cause consumers toperceive differences thatdo not exist. They provide consumerswith information aboutquality. They give firms the incentive to maintainhigh quality. CRC Microeconomics

  18. Now you know … • what is meant by monopolistic competition. • the special features of monopolistic competition. CRC Microeconomics

  19. What did you study last time? • what is meant by an oligopoly. • what is meant by a duopoly. • how game theory is applied to oligopoly. • how governments deal with oligopoly. CRC Microeconomics

  20. See You! Take Care! CRC Microeconomics

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