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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 Competitive Market 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! Monopoly 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 Oligopoly 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. Monopolistic Competition The market has many firms but each supplier’s product is differentiated. Consumers can be induced to change brands but they have brand preferences. Question What is the appropriate market structure model for each of these products or firms: competitive, monopoly, oligopoly, monopolistic competition? The Campus Store Kinko’s Pepperidge Farm’s Whole Wheat Bread PowerMac computer Windows computer Viagra Morton salt AT&T long distance Answers 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 Monopolistic Competition Structure: 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. On Differentiation 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. Why tangent? 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 Efficiency: 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.