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MONOPOLISTIC COMPETITION. A market form in which there is: 1) Product differentiation. 2) Many firms. 3) Easy entry and exit. The importance of monopolistic competition is that it seems to explain aspects of many important real world markets. SOME EXAMPLES. Shoe stores Pizza parlors

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monopolistic competition
MONOPOLISTIC COMPETITION
  • A market form in which there is:
  • 1) Product differentiation.
  • 2) Many firms.
  • 3) Easy entry and exit.

Monopolistic competition

slide2
The importance of monopolistic competition is that it seems to explain aspects of many important real world markets.

Monopolistic competition

some examples
SOME EXAMPLES
  • Shoe stores
  • Pizza parlors
  • Fast food, in general
  • Local moving companies
  • Hand calculators
  • PC compatible clones
  • Others you can think of ...

Monopolistic competition

slide4

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  • The demand curve facing a monopolistically competitive firm looks very much like that facing a monopoly, but it is very elastic due to the presence of many close substitutes.

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Greasy Sam’s Hamburgers

Monopolistic competition

slide5

Because the demand curve is negatively sloped marginal revenue must be less than average revenue.

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Greasy Sam’s Hamburgers

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Monopolistic competition

slide6
The short-run analysis of the monopolistically competitive firm proceeds exactly as for monopoly, because in the short-run entry and exit are not possible.

Monopolistic competition

slide7

With the the cost curves shown below, the firm can maximize profits by choosing output where MC = MR.

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MC

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Greasy Sam’s Hamburgers

Monopolistic competition

slide8

Profits are shown by the shaded area.

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MC

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Greasy Sam’s Hamburgers

Monopolistic competition

slide9

What happens in the long-run, as firms can enter or leave?

The following hidden slide shows the process.

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MC

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Hidden slide

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Greasy Sam’s Hamburgers

Monopolistic competition

slide10
Do monopolistically competitive firms operate in society’s interest? Do they produce outputs and sell at prices which maximize surplus? Are the firms economically efficient?

Monopolistic competition

slide11
SUMMARY OF MONOPOLISTIC COMPETITION
  • 1) In the short-run firms choose price and output by setting MC = MR.
  • 2) In the long-run entry of new firms assures that profit will be zero.
  • 3) Some economic inefficiency exists because in equilibrium price is higher than marginal cost.

Monopolistic competition