Table of Contents

2. Table of Contents Access Prior Knowledge New Information Set Goals Activity Conclusion Identifying Market Structure “Monopolistic Competition” Targets Characteristics Product Differentiation “Monopolistic Competition” Targets How It Differs Product Differentiation Short Run vs. Long Run Advertising Branding

3. The characteristics of all four market structures are provided in the box. Use this information to help you decide which of the following market structures best describes each market listed below. • Perfect Competition (PC) • Monopolistic Competition (MC) • Oligopoly (O) • Monopoly (M) Identifying Market Structure

4. The characteristics of all four market structures are provided in the box. Use this information to help you decide which of the following market structures best describes each market listed below. • Perfect Competition (PC) • Monopolistic Competition (MC) • Oligopoly (O) • Monopoly (M) Identifying Market Structure _____ 1) Diamonds _____ 9) Tomatoes _____ 2) Wheat _____ 10) Strawberries _____ 3) Airline Travel _____ 11) Hair Salons _____ 4) Fast Food Restaurants _____ 12) Local Electric Company _____ 5) American Automobiles _____ 13) Breakfast Cereals _____ 6) Shampoo _____ 14) Retail Clothing Stores _____ 7) Cell Phone Service _____ 15) National Football League (NFL) Show Answers _____ 8) Amtrak Train Travel _____ 16) Televisions

5. The characteristics of all four market structures are provided in the box. Use this information to help you decide which of the following market structures best describes each market listed below. • Perfect Competition (PC) • Monopolistic Competition (MC) • Oligopoly (O) • Monopoly (M) Identifying Market Structure M PC _____ 1) Diamonds _____ 9) Tomatoes PC PC _____ 2) Wheat _____ 10) Strawberries O MC _____ 3) Airline Travel _____ 11) Hair Salons MC M _____ 4) Fast Food Restaurants _____ 12) Local Electric Company O O _____ 5) American Automobiles _____ 13) Breakfast Cereals MC MC _____ 6) Shampoo _____ 14) Retail Clothing Stores O M _____ 7) Cell Phone Service _____ 15) National Football League (NFL) M MC _____ 8) Amtrak Train Travel _____ 16) Televisions

6. “Monopolistic Competition” Targets Knowledge 5 Understand the definition and characteristics of a market that is in monopolistic competition. Reasoning 8 Explain why monopolistic competition often leads to product differentiation, advertising, and branding.

7. Characteristics Monopolistic competition has characteristics that make it similar to both monopoly and perfect competition.

8. Characteristics Monopolistic competition has characteristics that make it similar to both monopoly and perfect competition. 1) Many Sellers Each firm has a small amount of market power, but there is no possibility for collusion. Shampoo is a great example of just how many different firms can exist in a single market, all with differing prices and qualities.

9. Characteristics Monopolistic competition has characteristics that make it similar to both monopoly and perfect competition. 1) Many Sellers Each firm has a small amount of market power, but there is no possibility for collusion. 2) Differentiated Products Firms produce imperfect substitutes, products that are close substitutes but are still distinct. Cheeseburgers from McDonald’s and Burger King could be considered substitutes, but most consumers consider them to be very different.

10. Characteristics Monopolistic competition has characteristics that make it similar to both monopoly and perfect competition. 1) Many Sellers Each firm has a small amount of market power, but there is no possibility for collusion. 2) Differentiated Products Firms produce imperfect substitutes, products that are close substitutes but are still distinct. 3) Low Barriers to Entry In the long run, firms are free to enter or exit the industry. Markets, such as hair salons, can see lots of new entrants in a short time if the market can support them. Likewise, many can fail quickly, too.

11. How It Differs The items below list how monopolistic competition differs from the other market structures.

12. How It Differs The items below list how monopolistic competition differs from the other market structures. 1) Perfect Competition MC firms have some power to set prices, and products are not identical. Pizza restaurants have some ability to affect the price of their pizzas, but beyond a certain point people will simply purchase from a competitor.

13. How It Differs The items below list how monopolistic competition differs from the other market structures. 1) Perfect Competition MC firms have some power to set prices, and products are not identical. 2) Monopoly MC firms do sell unique products, but imperfect substitutes provide competition. All guitar manufacturers certainly make distinctive products, but most consumers would consider many guitars to be substitutes for each other.

14. How It Differs The items below list how monopolistic competition differs from the other market structures. 1) Perfect Competition MC firms have some power to set prices, and products are not identical. 2) Monopoly MC firms do sell unique products, but imperfect substitutes provide competition. 3) Oligopoly There is free entry and there are many MC firms, which prevents collusion. The number of clothing stores available makes collusion between firms impossible.

15. Product Differentiation One of the key features of monopolistic competition is product differentiation. Firms can differentiate their products in one of three ways.

16. Product Differentiation One of the key features of monopolistic competition is product differentiation. Firms can differentiate their products in one of three ways. 1) By Style or Type Includes differences in features, design, packaging, or service. No two hair salons are alike. Each offers different hair styles based on gender, age, culture, income, preference, etc.

17. Product Differentiation One of the key features of monopolistic competition is product differentiation. Firms can differentiate their products in one of three ways. 1) By Style or Type Includes differences in features, design, packaging, or service. 2) By Location Consumers often choose a product based on convenience even if it is more expensive. Many small hair salons can succeed because people are likely choose one that is close to their house.

18. Product Differentiation One of the key features of monopolistic competition is product differentiation. Firms can differentiate their products in one of three ways. 1) By Style or Type Includes differences in features, design, packaging, or service. 2) By Location Consumers often choose a product based on convenience even if it is more expensive. 3) By Quality Some professional stylists can charge hundreds of dollars per customer, but most consumers settle for something cheaper than that. Some consumers are willing to pay more for higher quality products.

19. Short Run vs. Long Run Firms can make abnormal profits in the short run but not in the long run.

20. MC ATC DTotal D1 D1 MR1 Short Run vs. Long Run Firms can make abnormal profits in the short run but not in the long run. 1) A Firm Making a Profit

21. MC ATC DTotal Profit D1 D1 MR1 Short Run vs. Long Run Firms can make abnormal profits in the short run but not in the long run. 1) A Firm Making a Profit A) A profitable firm will attract new firms to the market.

22. MC ATC DTotal DTotal Profit D1 D1 D2 D1 MR1 Short Run vs. Long Run Firms can make abnormal profits in the short run but not in the long run. 1) A Firm Making a Profit A) A profitable firm will attract new firms to the market. B) More competitors decreases each firm’s demand curve.

23. MC MC ATC ATC DTotal DTotal D1 D2 D1 D2 D1 MR2 MR1 Short Run vs. Long Run Firms can make abnormal profits in the short run but not in the long run. 1) A Firm Making a Profit A) A profitable firm will attract new firms to the market. B) More competitors decreases each firm’s demand curve. C) Individual demand curves decrease like this until profits are gone. No Profit

24. MC ATC DTotal D3 D3 MR3 Short Run vs. Long Run Firms can make abnormal profits in the short run but not in the long run. 1) A Firm Making a Profit 2) A Firm Suffering a Loss A) A profitable firm will attract new firms to the market. B) More competitors decreases each firm’s demand curve. C) Individual demand curves decrease like this until profits are gone.

25. MC ATC Loss DTotal D3 D3 MR3 Short Run vs. Long Run Firms can make abnormal profits in the short run but not in the long run. 1) A Firm Making a Profit 2) A Firm Suffering a Loss A) A profitable firm will attract new firms to the market. A) Unprofitable firms will cause firms to leave the market. B) More competitors decreases each firm’s demand curve. C) Individual demand curves decrease like this until profits are gone.

26. MC ATC Loss DTotal DTotal D3 D3 D4 D3 MR3 Short Run vs. Long Run Firms can make abnormal profits in the short run but not in the long run. 1) A Firm Making a Profit 2) A Firm Suffering a Loss A) A profitable firm will attract new firms to the market. A) Unprofitable firms will cause firms to leave the market. B) More competitors decreases each firm’s demand curve. B) Fewer competitors increases each firm’s demand curve. C) Individual demand curves decrease like this until profits are gone.

27. MC MC ATC ATC DTotal DTotal D3 D4 D3 D4 D3 MR3 MR4 Short Run vs. Long Run Firms can make abnormal profits in the short run but not in the long run. 1) A Firm Making a Profit 2) A Firm Suffering a Loss A) A profitable firm will attract new firms to the market. A) Unprofitable firms will cause firms to leave the market. B) More competitors decreases each firm’s demand curve. B) Fewer competitors increases each firm’s demand curve. C) Individual demand curves decrease like this until profits are gone. C) Individual demand curves increase like this until any losses are gone. No Loss

28. Advertising Advertising is a controversial economic subject, but it is generally considered that it does affect the demand curve and increases revenue.

29. Advertising Advertising is a controversial economic subject, but it is generally considered that it does affect the demand curve and increases revenue. 1) Why do firms advertise? A) It helps differentiate their products from other firms.

30. Advertising Advertising is a controversial economic subject, but it is generally considered that it does affect the demand curve and increases revenue. 1) Why do firms advertise? A) It helps differentiate their products from other firms. B) Differentiated products give firms more market power, allowing them to charge higher prices.

31. D1 D1 D2 Advertising Advertising is a controversial economic subject, but it is generally considered that it does affect the demand curve and increases revenue. 1) Why do firms advertise? A) It helps differentiate their products from other firms. B) Differentiated products give firms more market power, allowing them to charge higher prices. 2) Why Can They Charge More? A) Demand increases since consumer tastes and brand loyalty are affected. Remember, whenever demand increases, it means more output is being sold at a higher price.

32. D1 D1 D2 Advertising Advertising is a controversial economic subject, but it is generally considered that it does affect the demand curve and increases revenue. 1) Why do firms advertise? A) It helps differentiate their products from other firms. B) Differentiated products give firms more market power, allowing them to charge higher prices. 2) Why Can They Charge More? A) Demand increases since consumer tastes and brand loyalty are affected. B) Demand also increases since the perceived utility of the item increases. Remember, whenever demand increases, it means more output is being sold at a higher price.

33. D3 D1 D1 Advertising Advertising is a controversial economic subject, but it is generally considered that it does affect the demand curve and increases revenue. 1) Why do firms advertise? A) It helps differentiate their products from other firms. B) Differentiated products give firms more market power, allowing them to charge higher prices. 2) Why Can They Charge More? A) Demand increases since consumer tastes and brand loyalty are affected. B) Demand also increases since the perceived utility of the item increases. Notice how the higher price on D3 has the caused the firm not to lose as many customers as on D1. C) Differentiated products are relatively more inelastic.

34. Branding Branding refers to the distinctive identity that a particular name, phrase, or symbol bestows on a firm and its products.

35. Branding Branding refers to the distinctive identity that a particular name, phrase, or symbol bestows on a firm and its products. 1) It provides quality assurance. A) Consumers are willing to pay for a brand name for its quality. Consumers are often willing to spend more on a pricey brand name television simply because of its reputation for quality.

36. Branding Branding refers to the distinctive identity that a particular name, phrase, or symbol bestows on a firm and its products. 1) It provides quality assurance. A) Consumers are willing to pay for a brand name for its quality. B) If a brand name fails in its quality, it will be punished by the market. When the E. coli bacteria was found in some Jack-in-the-Box hamburger meat in 1993, its sales and stock plummeted.

37. Branding Branding refers to the distinctive identity that a particular name, phrase, or symbol bestows on a firm and its products. 1) It provides quality assurance. A) Consumers are willing to pay for a brand name for its quality. B) If a brand name fails in its quality, it will be punished by the market. 2) It provides information. A) Especially in new situations, consumers turn to known brands. Imagine you are in an unfamiliar town and need a hotel for the night. You are much more likely to stay at a brand name hotel even if it costs more.

38. Branding Branding refers to the distinctive identity that a particular name, phrase, or symbol bestows on a firm and its products. 1) It provides quality assurance. A) Consumers are willing to pay for a brand name for its quality. B) If a brand name fails in its quality, it will be punished by the market. 2) It provides information. A) Especially in new situations, consumers turn to known brands. Suppose you have a favorite shampoo brand. If you are in need of face wash, hand lotion, or sunscreen, you may use the same brand. B) Consumers are more likely to purchase new products if it has a familiar brand name.

39. Product Differentiation OVERVIEW Many of the products we buy come from monopolistically competitive markets. The firms in these markets can increase their market power, which equates to more revenue, by differentiating their products from their competitors’ products. Firms can do this in three different ways: by style or type; by location; or by quality. DIRECTIONS You need one set of “Product Differentiation Cards” and a “Product Differentiation Dice.” Spread the cards out on your desk face down (like Go Fish). One group member rolls the die and picks one card. The cards have monopolistically competitive markets listed on them. Whatever is rolled on the die tells you how to differentiate the market you drew. Write your answers in the table. All group members take turns.

40. “Monopolistic Competition” Targets Knowledge 5 Understand the definition and characteristics of a market that is in monopolistic competition. Reasoning 8 Explain why monopolistic competition often leads to product differentiation, advertising, and branding.

41. Resources