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Monopolistic Competition

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.

Samuel
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Monopolistic Competition

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  1. Monopolistic Competition

  2. 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.

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

  4. Monopolistic Competition Examples are omnipresent: 2. Also in the Service Industries a. Barbers, b. Morticians c. Accountants, d. Lawyers, etc. .

  5. Monopolistic Competition 1. ease of entry 2.costs of production (increasing--,decreasing--, and constant-cost “industries”) The industry is in part similar to competition:

  6. 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.

  7. 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

  8. 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

  9. 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:

  10. 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

  11. Monopolistic Competition Compared to pure competition: • 1. P slightly higher, Q slightly less. • 2. Some inefficiency. Firms won’t build optimal scale of plant.

  12. Monopolistic Competition Compared to pure competition: • 3. No rivalries. No retaliation for business policy change. • Wide range of product types & variety. • Advertising a waste?

  13. LAC SACo Dpc=Ppc SACo=optimal scale Monopolistic Competition Efficiency: Can a downward sloping line be tangent to a horizontal (pure competition D) one?

  14. LAC SACmc SACo Dmc Monopolistic Competition Efficiency: Can a downward sloping line be tangent to a horizontal (pure competition D) one?

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