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Monopolistic Competition. P 1. P 2. P 3. P 4. Monopolistic Competition. This industry is in part similar to monopoly: Product differentiation . Some control over P, so D slopes slightly. Prices Cluster. Not an “industry,” a “product group.” with 10 or 20 sellers.

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Presentation Transcript
slide2

P1

P2

P3

P4

Monopolistic Competition

This industry is in part similar to monopoly:

Product differentiation

Some control over P, so D slopes slightly.

Prices Cluster

Not an “industry,” a “product group.” with 10 or 20 sellers.

slide3

Monopolistic Competition

  • Examples are omnipresent:
  • Relatively inexpensive retail products
  • a. Soaps, breakfast cereals, toiletries.
  • b. Gasoline service stations

.

slide4

Monopolistic Competition

Examples are omnipresent:

2. Also in the Service Industries

a. Barbers,

b. Morticians

c. Accountants,

d. Lawyers, etc.

.

slide5

Monopolistic Competition

1. ease of entry

2.costs of production

(increasing--,decreasing--, and constant-cost “industries”)

The industry is in part similar to competition:

slide6

Monopolistic Competition

  • With entry, costs...
  • Rise--most likely?
  • Stay the same
  • Fall--least likely

In the short run, entry is not possible. The industry is just like a monopoly--almost.

slide7

Monopolistic Competition

This is a short-run, positive

Net revenues equilibrium.

In the long run, if entry is blocked, we may have...

the opportunity to maintain positive economic profits.

The short run looks just like the long run.

MC

AC

AR

MR

slide8

Monopolistic Competition

In the long run, we may have...

2. Free Entry,

which has this appearance.

Why does entry squeeze out all economic (or pure) profit?

MC

AC

AR

MR

slide9

S1

S4

D

D1

D4

Monopolistic Competition

Entry pushes the firm’s demand curve downward

Entry

In pure competition:

P

Firm

Industry

In monopolistic competition:

slide10

AC1

AC2

D1

D1

D1

AC2

D2

AC1

D2

D2

Monopolistic Competition

Likewise, entry affects costs:

ACk

1. Costs rise to meet falling D

2. D falls to meet constant costs

3. D overtakes falling costs

slide11

Monopolistic Competition

Compared to pure competition:

  • 1. P slightly higher, Q slightly less.
  • 2. Some inefficiency. Firms won’t build optimal scale of plant.
slide12

Monopolistic Competition

Compared to pure competition:

  • 3. No rivalries. No retaliation for business policy change.
  • Wide range of product types & variety.
  • Advertising a waste?
slide13

LAC

SACo

Dpc=Ppc

SACo=optimal scale

Monopolistic Competition

Efficiency:

Can a downward sloping line be tangent to a horizontal (pure competition D) one?

slide14

LAC

SACmc

SACo

Dmc

Monopolistic Competition

Efficiency:

Can a downward sloping line be tangent to a horizontal (pure competition D) one?