Bài giảng topic 7(a) monopolisstic competition

Product differentiation and Advertising... Characteristics of MC Large number of small firms  so individual decisions have little or no impact on other firms’ decisions  Differentiate

Monopolistic Competition

Topic 7(a)

1 Characteristics of MC

2 Short run profit maximisation

3 Long run equilibrium

4 Assessment of MC

5 Product differentiation and Advertising

Characteristics of MC

 Large number of small firms

 so individual decisions have little or no impact on other firms’ decisions

 Differentiated products

 similar but not identical

 Low barriers to entry

 low economies of scale

 low set-up costs

Price and Output Determination

The Firm’s Demand Curve in MC is:

 Highly elastic, Why?

 More close substitutes than a pure monopolist

 Not perfect substitutes (as is the case with perfect competition)

 Elasticity depends on

 number of rivals

 degree of product differentiation

Short-Run Price and Output Determination

Rules for Profit maximization same as under Perfect Competition

 MR = MC (where MC cuts MR from below)

 Short Run: P ≥ AVC

 Long Run : P ≥ ATC

Economic Profits

Short-Run Price and Output Determination: Short-Run Profits

Q D

P

MR

MC

Q

AC

Q D

P

MR

MC

Q

ATC

Short-Run Price and Output Determination: Short-Run Losses

Long Run

 How much to produce?

 MR = MC

 Firms tend to break even, i.e normal

profit

 Tangency solution: profit-maximising firm will produce an output when its demand curve is

at a tangent to its ATC curve

 When ATC = Price

Long run Equilibrium

Long-Run Equilibrium

 Why do monopolistically competitive firms

tend to break even in the long run?

 Profits attract new entrants

 Losses encourage exits

 Some complications

 Some product differentiation

 Some entry is partially restricted

 Some economic losses may be tolerated by firms in the long run

Assessment of MC (vs PC)

 Higher price, lower output

 lower consumer surplus

 like monopoly

 P > MC

 No allocative eff.

 P = AC

 like PC but

 P ≠ min AC

 No productive eff.

Monopolistic Competition &

Economic Efficiency

is not necessarily chosen

 excess capacity

 Allocative inefficiency :

 price does not necessarily equal MC

 product variety

Non-price Competition

(ie competition not based on price)

Product differentiation:

Real and/or perceived differences created by factors such as: quality, brands, service, location, advertising and packaging

Advantages

 More choice

 Innovation => Better products

 Avoid price war

Disadvantages

 Too much choice?

 Superficial product changes – waste of resources

Non-price Competition -

Advertising

Firm

Advantages of Advertising

 influences consumer preferences (the power of persuasion)

 makes demand more price inelastic

 Increases market power, market share

Disadvantages of Advertising

 Increases cost of production

Non-price Competition –

Advertising (cont.)

Society

Advantages of Advertising

 Provides information

 Promotes competition

 Advertising revenue – cheaper media (television, newspapers etc) for users

Disadvantages of Advertising

 Misleading or false information

 Waste of resources if overall market demand stays constant

 Creates barriers to entry (financial, brand loyalty)

 Media bias towards advertisers