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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.
srmc sratc PMC atc d xMC mr Monopolistic Competition - Short Run Conduct • The monopolistically competitive firm looks and acts just like a mini-monopolist. • Example: Gloria Vanderbilt Jeans $ x
$ lratc lrmc PMC d x xMC mr 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? • answer: No. • 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.
