Monopolistic Competition. Market Structures - Review. Competitive: many firms, identical products Monopoly: single firm, no close substitutes Oligopoly: several firms, similar products, degree of product differentiation varies depending upon the market
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Market Structures - Review
- Competitive: many firms, identical products
- Monopoly: single firm, no close substitutes
- Oligopoly: several firms, similar products, degree of product differentiation varies depending upon the market
- Monopolistic competition: many firms, similar products, slightly differentiated products
- This is the classic “textbook” market structure.
- Firms in a competitive market all make a product that is perfectly substitutable: all demanders are equally satisfied with any supplier’s product. Firms are price takers.
- Hot dogs!
- The single seller makes a product that has no good substitute.
- Other firms may be able to produce the good or service but choose not to enter the market or are barred from it. Firms are price makers.
- Some pharmaceuticals
- A few sellers make products that are good, but not perfect, substitutes.
- Consumers can be induced to change suppliers but have only a limited number of choices.
- The market has many firms but each supplier’s product is differentiated.
- Consumers can be induced to change brands but they have brand preferences.
- What is the appropriate market structure model for each of these products or firms: competitive, monopoly, oligopoly, monopolistic competition?
- The Campus Store
- Pepperidge Farm’s Whole Wheat Bread
- PowerMac computer
- Windows computer
- Morton salt
- AT&T long distance
- The Campus Store: most products competitive, textbooks oligopoly
- Kinko’s: monopolistic competition (differentiated service)
- Pepperidge Farm’s Whole Wheat Bread: competition or monopolistic competition (slightly differentiated recipes)
- PowerMac computer and clones: monopoly, under license.
- Windows computer: monopolistic competition (differentiated features)
- Viagra: monopoly
- Morton salt: competitive
- AT&T long distance: oligopoly
- Several firms in the market.
- Producing differentiated products.
- “Free” entry and exit.
- Full and symmetric information.
- 1st and 3rd smack of perfect competition.
- 2nd adds a monopoly ingredient.
- Could be:
- actual: taste, color, location, service, etc.
- perceived: L.e.i. jeans vs. Wranglers!
- Advertising often plays a big role in monopolistically competitive markets
An Historical Note:
- Intellectual “parents”
- Joan Robinson (economist at Cambridge in the U.K.)
- Edward Chamberlin (economist at Harvard in Cambridge, MA)
- Both pioneered the work on monopolistic competition in the early 1930’s.
Monopolistic Competition - Short Run Conduct
- The monopolistically competitive firm looks and acts just like a mini-monopolist.
- Example: Gloria Vanderbilt Jeans
Monopolistic Competition - Long Run Conduct
- Free entry will force firm long run economic profits to zero.
- So: 1) profit max;2) zero profit; and3) a downward sloping firm demand and corresponding marginal revenue.
- Firm demand will be tangent to its long run average total cost curve.
- Firms profit maximize but free entry will force firm long run economic profits to zero.
- 1) profit max implies that mr=mc at xmc
- 2) zero profit implies that P=lratc at xmc
- 3) product differentiation implies a downward sloping firm demand and corresponding marginal revenue
- Firm demand must be tangent to the long run average total cost curve - which must occur to the left of the lratc curve’s minimum point.
Monopolistic Competition- Performance
- Is the monopolistically competitive firm Pareto Efficient? That is, at xMC is net social surplus maximized? Does $MB=$MC at xMC?
- Is the monopolistically competitive firm productively efficient? Does the firm operate at minimum efficient scale?
- answer: NO! There is “excess capacity.”
- Is this “excess capacity” bad?
- Isn’t variety really the spice of life?
- Don’t forget there’s always equity to consider, too.