Description
Monopolistic Competition is a type of Imperfect competition such that many producers sell products that are differentiated from one another.
Chapter 16
Monopolistic Competition
Imperfect Competition
•
We have so far seen two kinds of markets:
–
Perfect competition
• Many byers
• Many sellers
• !ll sellers sell the e"act same prodct
–
Monopoly
• Many byers
• #ne seller$ the monopolist
•
%hese are the two e"treme cases
•
Imperfect Competition refers to markets in which
the de&ree of competition amon& sellers falls
somewhere in between these e"tremes
'
Imperfect Competition
•
%here are two main types of Imperfect
Competition
–
Monopolistic Competition
•
Many sellers
•
%hey sell prodcts that are similar bt not identical
•
(ew firms can enter freely$ in the lon& rn
–
Oligopoly
•
#nly a few sellers
•
%he prodct sold may be identical or similar bt not
identical
•
(ew firms find it difficlt to enter
)
%he *or %ypes of Market +trctres
• %ap water
• Cable %,
Monopoly
• (ovels
• Movies
Monopolistic
Competition
• %ennis balls
• Ci&arettes
#li&opoly
Number of Firms?
Perfect
• Wheat
• Milk
Competition
Type of Products?
Identical
prodcts
-ifferentiated
prodcts
#ne
firm
*ew
firms
Many
firms
.
Monopolistic Competition
•
%his chapter focses on monopolistic
competition
•
Main featres of monopolistic competition
–
Many sellers
–
Prodct differentiation: similar bt non/
identical prodcts
–
*ree entry and e"it
0
Monopolistic Competition: main
featres
•
Many +ellers
–
%here are many firms competin& for the same
&rop of cstomers1
•
Prodct e"amples inclde books$ C-s$ movies$
compter &ames$ restarants$ piano lessons$
cookies$ frnitre$ etc1
•
%his featre of monopolistic competition is shared
with perfect competition$ which we stdied in an
earlier chapter
–
+o$ the decisions made by one firm do not
affect other firms in any perceptible way
6
Monopolistic Competition: main
featres
•
Prodct -ifferentiation
–
2ach firm prodces a prodct that
is at least slightly different from
those of other firms1 !s a reslt$
–
3ather than bein& a price taker$
each firm faces a downward-
sloping demand curve1
•
Monopolistic Competition shares this
featre with monopoly$ which we
stdied in an earlier chapter
4
-emand
5antity
Price
Monopolistic Competition: main
featres
•
*ree 2ntry or 2"it
–
*irms can enter or e"it the market withot any
difficlty1 !s a reslt$
–
%he nmber of firms in the market ad6sts
ntil economic profits are 7ero1
•
%his is another featre of monopolistic competition
that it shares with perfect competition
8
3ecap: Monopoly
Quantity 9
Price
Profit/
ma"imi7in&
:antity
Price
-emand
MR
ATC
!vera&e
total cost
Profit
MC
;
- Monopolistic Competition in the
+hort 3n
Quantity 9
Price
Profit/
ma"imi7in&
:antity
Price
-emand
MR
ATC
(a) Firm Makes Profit
!vera&e
total cost
Profit
MC
19
These profits will
not last.
hort!run
economic profits
encoura"e new
firms to enter the
market.
This reduces the
demand faced by
firms already in the
market (incumbent
firms)
#ncumbent firms$
demand cur%es
shift to the left.
Their profits fall&
Monopolistic Competition: effect of the entry
of new firms on an incmbent
Quantity 9
Price
Profit/
ma"imi7in&
:antity
Price
-emand
MR
ATC
(a') Firm Makes (ess Profit
ATC
Profit
MC
11
These profits will
not last either.
Profits encoura"e
new firms to enter
the market.
This reduces the
demand faced by
incumbent firms
#ncumbent firms$
demand cur%es
shift to the left.
Their profits fall&
Monopolistic Competition in the ?on& 3n
Quantity 9
Price
Profit/
ma"imi7in&
:antity
-emand
MR
ATC
(a)) Firm Makes No Profit
Price = ATC
MC
1'
@ero profit
Monopolistic Competitors in the +hort 3n
-emand
Quantity 9
Price
Price
?oss/
minimi7in&
:antity
!vera&e
total cost
(b) Firm Makes (osses
MR
?osses
ATC
MC
1)
These losses will
not last.
(osses force some
incumbent firms to
exit the market.
This will increase
the demand faced
by the remainin"
firms
Their demand
cur%es will shift to
the ri"ht.
Their losses will
shrink
#n the lon" run*
profits will be +ero,
Monopolistic Competition in the ?on& 3n$ a&ain
Quantity
Price
9
-emand
MR
ATC
MC
Profit/ma"imi7in&
:antity
P A ATC
1.
We have seen that in
the lon& rn profits
cannot be positive or
ne&ative1
%herefore$ profits
mst be 7ero>
(ote that P - ATC .
MR - MC in lon& rn
e:ilibrim1
MR A MC
Monopolistic Competition verss
Perfect Competition
•
!ll firms ma"imi7e profits
– We saw in an earlier chapter that this means MR A MC
– +o$ MR A MC is tre nder both monopolistic and perfect
competition
•
Monopolistic competition is like monopoly in the sense
that firms face downward/slopin& demand crves
– We saw in the chapter on monopoly that downward/slopin&
demand crves imply P B MR
•
Monopolistic competition is like perfect competition in
the sense that there is free entry in the lon& rn
– We saw in the chapter on perfect competition that this
means P A ATC
•
+o$ simply by lookin& at the featres of monopoly and
perfect competition that are combined in monopolistic
competition$ we can see that P - ATC . MR - MC
10
Monopolistic Competition verss Perfect
Competition
•
%wo main differences:
–
e"cess capacity$ and
–
price markp over mar&inal cost1
16
Perfect /ompetition Monopolistic
/ompetition
2"cess Capacity (o: e:ilibrim :antity A
efficient otpt1
Ces: e:ilibrim :antity
D efficient otpt
Price Markp (o: P A MC Ces: P B MC
Monopolistic Competition verss Perfect Competition
Quantity 9
Price
-emand
(a) Monopolistically /ompetiti%e Firm
Quantity 9
Price
P A MC P A MR
Edemand
crveF
(b) Perfectly /ompetiti%e Firm
Markp
2"cess capacity
MC
ATC
MC
ATC
MR
Mar&inal
cost
2fficient
scale
P
5antity
prodced
5antity prodced A
2fficient scale
14
%he lon& rn e:ilibrim nder monopolistic
competition shows both e"cess capacity and
a price markp over mar&inal cost1 Gnder
perfect competition$ thereHs neither1
%he basic reason for this difference in
otcome lies in the difference in the slope of
the firmHs demand$ which is ne&atively
sloped in monopolistic competition and
hori7ontal nder perfect competition1
P - ATC . MR - MC P - ATC - MR - MC
Monopolistic Competition
and the Welfare of +ociety
•
Monopolistic competition does not have all
the desirable properties of perfect
competition1
18
Monopolistic Competition
and the Welfare of +ociety
1;
Quantity
Price
9
-emand
MR
ATC
MC
Profit/ma"imi7in&
:antity
P A ATC
#ptimm
?on& rn
e:ilibrim
(ote that at the
optimm otcome
P A MC D ATC1
+o$ the optimm
can be enforced
by a &overnment
re&lator only
thro&h sbsidies1
Monopolistic Competition
and the Welfare of +ociety
•
%he markp of price over mar&inal cost in
both monopoly and monopolistic competition
leads to deadwei&ht loss
•
Iowever$ the administrative brden of
re&latin& the pricin& of all firms that prodce
differentiated prodcts wold be
overwhelmin&1
•
!s profits are 7ero in the lon& rn$ re&latin&
a price closer to mar&inal cost will lead to
losses that can be sstained only with
sbsidies
'9
Monopolistic Competition
and the Welfare of +ociety
•
!nother way in which monopolistic
competition may be socially inefficient is
that the nmber of firms in the market may
not be the JidealK one1
–
%here may be too mch or too little entry1
'1
Monopolistic Competition
and the Welfare of +ociety
•
2"ternalities of entry inclde:
–
prodct/variety e"ternalities
–
bsiness/stealin& e"ternalities
''
Monopolistic Competition
and the Welfare of +ociety
•
%he product-variety externality:
–
Lecase consmers &et some consmer srpls
from the introdction of a new prodct$ entry of a
new firm conveys a positive externality on
consmers1
•
%he usiness-stealing externality:
–
Lecase other firms lose cstomers and profits
from the entry of a new competitor$ entry of a new
firm imposes a negative externality on e"istin&
firms1
')
!-,23%I+I(M
•
When firms sell differentiated prodcts$ each
firm has an incentive to advertise in order to
attract more byers to its particlar prodct1
•
Gnder perfect competition$ there is no sch
incentive
•
Gnder monopoly$ there is some incentive to
advertise$ bt not a whole lot1
–
!fter all$ the monopolist has no rivals1
'.
!-,23%I+I(M
•
*irms that sell hi&hly differentiated consmer
&oodsNsch as over/the/conter dr&s$
perfmes$ soft drinks$ breakfast cerealsNtypically
spend between 19 and '9 percent of revene on
advertisin&1
•
*irms that sell indstrial prodctsNsch as drill
presses and commnications satellitesNtypically
spend very little on adverti7in&
•
*irms that sell ndifferentiated prodctsNsch as
wheat$ peants$ or crde oilNspend nothin& at all
•
#verall$ abot ' percent of total revene$ or over
O'99 billion a year$ is spent on advertisin&1
'0
!-,23%I+I(M
•
Critics of advertisin& ar&e that firms
advertise in order to maniplate peopleHs
tastes1
•
%hey also ar&e that it impedes
competition by implyin& that prodcts are
more different than they trly are1
'6
!-,23%I+I(M
•
-efenders ar&e that advertisin& provides
information to consmers
•
%hey also ar&e that advertisin& increases
competition by informin& consmers of
their options and enablin& them to do
comparison shoppin&
'4
!dvertisin& and the price of
eye&lasses
•
!dvertisin& may sharpen the distinctions between prodcts in
the byersH minds1 %his wold make demands less elastic and
pt pward pressre on prices
• !dvertisin& may intensify competition1 %his wold make
demand more elastic and pt downward pressre on prices
• In a 1;4' article in the !ournal of "aw and #conomics$
economist ?ee Lenham reported on the 1;6) prices of
prescription eye&lasses in states that allowed advertisin& for
eye&lasses and eye e"aminations and in states that prohibited
sch advertisin&
•
In states that prohibited sch advertisin&$ the avera&e price of a
pair of eye&lasses was O))
• In states that did not restrict advertisin&$ the avera&e price was
O'6
• %herefore$ at least in this market$ advertisin& fostered
competition and redced prices by more than '9 percent
'8
Malbraith verss Iayek
•
Pohn Qenneth Malbraith:
–
Corporations se advertisin& to create demand for
prodcts that people otherwise wold not want or
need
–
!dvertisin& was distortin& peopleHs preferences away
from pblic &oods and towards private &oods
•
*rederic Iayek:
–
!dvertisin& cannot persade someone to by a
prodct that he or she dislikes
–
#r tastes are often determined by what others tell s1
%here is nothin& particlarly e"ceptional or pernicios
abot the inflence of advertisers
';
!dvertisin& as a si&nal of :ality
•
%he willin&ness of a firm to spend
advertisin& dollars can be a signal to
consmers abot the :ality of the
prodct bein& offered1
)9
Lrand (ames
•
Critics ar&e that brand names case
consmers to perceive differences that do
not really e"ist1
)1
Lrand (ames
•
2conomists have ar&ed that brand names
may be a sefl way for consmers to
ensre that the &oods they are byin& are
of hi&h :ality1
–
providin& information abot :ality1
–
&ivin& firms incentive to maintain hi&h :ality1
•
%he :estion$ however$ is whether brand
name prodcts are better than &enerics by
an e"tent that 6stifies their hi&her prices
)'
%able 1 Monopolistic Competition: Letween
Perfect Competition and Monopoly
))
!ny 5estionsR
).
+mmary
•
! monopolistically competitive market is
characteri7ed by three attribtes: many
firms$ differentiated prodcts$ and free
entry1
•
%he e:ilibrim in a monopolistically
competitive market differs from perfect
competition in that each firm has e"cess
capacity and each firm char&es a price
above mar&inal cost1
)0
+mmary
•
Monopolistic competition does not have all
of the desirable properties of perfect
competition1
•
%here is a standard deadwei&ht loss of
monopoly cased by the markp of price
over mar&inal cost1
•
%he nmber of firms can be too lar&e or
too small1
)6
+mmary
•
%he prodct differentiation inherent in
monopolistic competition leads to the se of
advertisin& and brand names1
–
Critics ar&e that firms se advertisin& and
brand names to take advanta&e of consmer
irrationality and to redce competition1
–
-efenders ar&e that firms se advertisin& and
brand names to inform consmers and to
compete more vi&orosly on price and prodct
:ality1
)4
doc_980462749.ppt
Monopolistic Competition is a type of Imperfect competition such that many producers sell products that are differentiated from one another.
Chapter 16
Monopolistic Competition
Imperfect Competition
•
We have so far seen two kinds of markets:
–
Perfect competition
• Many byers
• Many sellers
• !ll sellers sell the e"act same prodct
–
Monopoly
• Many byers
• #ne seller$ the monopolist
•
%hese are the two e"treme cases
•
Imperfect Competition refers to markets in which
the de&ree of competition amon& sellers falls
somewhere in between these e"tremes
'
Imperfect Competition
•
%here are two main types of Imperfect
Competition
–
Monopolistic Competition
•
Many sellers
•
%hey sell prodcts that are similar bt not identical
•
(ew firms can enter freely$ in the lon& rn
–
Oligopoly
•
#nly a few sellers
•
%he prodct sold may be identical or similar bt not
identical
•
(ew firms find it difficlt to enter
)
%he *or %ypes of Market +trctres
• %ap water
• Cable %,
Monopoly
• (ovels
• Movies
Monopolistic
Competition
• %ennis balls
• Ci&arettes
#li&opoly
Number of Firms?
Perfect
• Wheat
• Milk
Competition
Type of Products?
Identical
prodcts
-ifferentiated
prodcts
#ne
firm
*ew
firms
Many
firms
.
Monopolistic Competition
•
%his chapter focses on monopolistic
competition
•
Main featres of monopolistic competition
–
Many sellers
–
Prodct differentiation: similar bt non/
identical prodcts
–
*ree entry and e"it
0
Monopolistic Competition: main
featres
•
Many +ellers
–
%here are many firms competin& for the same
&rop of cstomers1
•
Prodct e"amples inclde books$ C-s$ movies$
compter &ames$ restarants$ piano lessons$
cookies$ frnitre$ etc1
•
%his featre of monopolistic competition is shared
with perfect competition$ which we stdied in an
earlier chapter
–
+o$ the decisions made by one firm do not
affect other firms in any perceptible way
6
Monopolistic Competition: main
featres
•
Prodct -ifferentiation
–
2ach firm prodces a prodct that
is at least slightly different from
those of other firms1 !s a reslt$
–
3ather than bein& a price taker$
each firm faces a downward-
sloping demand curve1
•
Monopolistic Competition shares this
featre with monopoly$ which we
stdied in an earlier chapter
4
-emand
5antity
Price
Monopolistic Competition: main
featres
•
*ree 2ntry or 2"it
–
*irms can enter or e"it the market withot any
difficlty1 !s a reslt$
–
%he nmber of firms in the market ad6sts
ntil economic profits are 7ero1
•
%his is another featre of monopolistic competition
that it shares with perfect competition
8
3ecap: Monopoly
Quantity 9
Price
Profit/
ma"imi7in&
:antity
Price
-emand
MR
ATC
!vera&e
total cost
Profit
MC
;
- Monopolistic Competition in the
+hort 3n
Quantity 9
Price
Profit/
ma"imi7in&
:antity
Price
-emand
MR
ATC
(a) Firm Makes Profit
!vera&e
total cost
Profit
MC
19
These profits will
not last.
hort!run
economic profits
encoura"e new
firms to enter the
market.
This reduces the
demand faced by
firms already in the
market (incumbent
firms)
#ncumbent firms$
demand cur%es
shift to the left.
Their profits fall&
Monopolistic Competition: effect of the entry
of new firms on an incmbent
Quantity 9
Price
Profit/
ma"imi7in&
:antity
Price
-emand
MR
ATC
(a') Firm Makes (ess Profit
ATC
Profit
MC
11
These profits will
not last either.
Profits encoura"e
new firms to enter
the market.
This reduces the
demand faced by
incumbent firms
#ncumbent firms$
demand cur%es
shift to the left.
Their profits fall&
Monopolistic Competition in the ?on& 3n
Quantity 9
Price
Profit/
ma"imi7in&
:antity
-emand
MR
ATC
(a)) Firm Makes No Profit
Price = ATC
MC
1'
@ero profit
Monopolistic Competitors in the +hort 3n
-emand
Quantity 9
Price
Price
?oss/
minimi7in&
:antity
!vera&e
total cost
(b) Firm Makes (osses
MR
?osses
ATC
MC
1)
These losses will
not last.
(osses force some
incumbent firms to
exit the market.
This will increase
the demand faced
by the remainin"
firms
Their demand
cur%es will shift to
the ri"ht.
Their losses will
shrink
#n the lon" run*
profits will be +ero,
Monopolistic Competition in the ?on& 3n$ a&ain
Quantity
Price
9
-emand
MR
ATC
MC
Profit/ma"imi7in&
:antity
P A ATC
1.
We have seen that in
the lon& rn profits
cannot be positive or
ne&ative1
%herefore$ profits
mst be 7ero>
(ote that P - ATC .
MR - MC in lon& rn
e:ilibrim1
MR A MC
Monopolistic Competition verss
Perfect Competition
•
!ll firms ma"imi7e profits
– We saw in an earlier chapter that this means MR A MC
– +o$ MR A MC is tre nder both monopolistic and perfect
competition
•
Monopolistic competition is like monopoly in the sense
that firms face downward/slopin& demand crves
– We saw in the chapter on monopoly that downward/slopin&
demand crves imply P B MR
•
Monopolistic competition is like perfect competition in
the sense that there is free entry in the lon& rn
– We saw in the chapter on perfect competition that this
means P A ATC
•
+o$ simply by lookin& at the featres of monopoly and
perfect competition that are combined in monopolistic
competition$ we can see that P - ATC . MR - MC
10
Monopolistic Competition verss Perfect
Competition
•
%wo main differences:
–
e"cess capacity$ and
–
price markp over mar&inal cost1
16
Perfect /ompetition Monopolistic
/ompetition
2"cess Capacity (o: e:ilibrim :antity A
efficient otpt1
Ces: e:ilibrim :antity
D efficient otpt
Price Markp (o: P A MC Ces: P B MC
Monopolistic Competition verss Perfect Competition
Quantity 9
Price
-emand
(a) Monopolistically /ompetiti%e Firm
Quantity 9
Price
P A MC P A MR
Edemand
crveF
(b) Perfectly /ompetiti%e Firm
Markp
2"cess capacity
MC
ATC
MC
ATC
MR
Mar&inal
cost
2fficient
scale
P
5antity
prodced
5antity prodced A
2fficient scale
14
%he lon& rn e:ilibrim nder monopolistic
competition shows both e"cess capacity and
a price markp over mar&inal cost1 Gnder
perfect competition$ thereHs neither1
%he basic reason for this difference in
otcome lies in the difference in the slope of
the firmHs demand$ which is ne&atively
sloped in monopolistic competition and
hori7ontal nder perfect competition1
P - ATC . MR - MC P - ATC - MR - MC
Monopolistic Competition
and the Welfare of +ociety
•
Monopolistic competition does not have all
the desirable properties of perfect
competition1
18
Monopolistic Competition
and the Welfare of +ociety
1;
Quantity
Price
9
-emand
MR
ATC
MC
Profit/ma"imi7in&
:antity
P A ATC
#ptimm
?on& rn
e:ilibrim
(ote that at the
optimm otcome
P A MC D ATC1
+o$ the optimm
can be enforced
by a &overnment
re&lator only
thro&h sbsidies1
Monopolistic Competition
and the Welfare of +ociety
•
%he markp of price over mar&inal cost in
both monopoly and monopolistic competition
leads to deadwei&ht loss
•
Iowever$ the administrative brden of
re&latin& the pricin& of all firms that prodce
differentiated prodcts wold be
overwhelmin&1
•
!s profits are 7ero in the lon& rn$ re&latin&
a price closer to mar&inal cost will lead to
losses that can be sstained only with
sbsidies
'9
Monopolistic Competition
and the Welfare of +ociety
•
!nother way in which monopolistic
competition may be socially inefficient is
that the nmber of firms in the market may
not be the JidealK one1
–
%here may be too mch or too little entry1
'1
Monopolistic Competition
and the Welfare of +ociety
•
2"ternalities of entry inclde:
–
prodct/variety e"ternalities
–
bsiness/stealin& e"ternalities
''
Monopolistic Competition
and the Welfare of +ociety
•
%he product-variety externality:
–
Lecase consmers &et some consmer srpls
from the introdction of a new prodct$ entry of a
new firm conveys a positive externality on
consmers1
•
%he usiness-stealing externality:
–
Lecase other firms lose cstomers and profits
from the entry of a new competitor$ entry of a new
firm imposes a negative externality on e"istin&
firms1
')
!-,23%I+I(M
•
When firms sell differentiated prodcts$ each
firm has an incentive to advertise in order to
attract more byers to its particlar prodct1
•
Gnder perfect competition$ there is no sch
incentive
•
Gnder monopoly$ there is some incentive to
advertise$ bt not a whole lot1
–
!fter all$ the monopolist has no rivals1
'.
!-,23%I+I(M
•
*irms that sell hi&hly differentiated consmer
&oodsNsch as over/the/conter dr&s$
perfmes$ soft drinks$ breakfast cerealsNtypically
spend between 19 and '9 percent of revene on
advertisin&1
•
*irms that sell indstrial prodctsNsch as drill
presses and commnications satellitesNtypically
spend very little on adverti7in&
•
*irms that sell ndifferentiated prodctsNsch as
wheat$ peants$ or crde oilNspend nothin& at all
•
#verall$ abot ' percent of total revene$ or over
O'99 billion a year$ is spent on advertisin&1
'0
!-,23%I+I(M
•
Critics of advertisin& ar&e that firms
advertise in order to maniplate peopleHs
tastes1
•
%hey also ar&e that it impedes
competition by implyin& that prodcts are
more different than they trly are1
'6
!-,23%I+I(M
•
-efenders ar&e that advertisin& provides
information to consmers
•
%hey also ar&e that advertisin& increases
competition by informin& consmers of
their options and enablin& them to do
comparison shoppin&
'4
!dvertisin& and the price of
eye&lasses
•
!dvertisin& may sharpen the distinctions between prodcts in
the byersH minds1 %his wold make demands less elastic and
pt pward pressre on prices
• !dvertisin& may intensify competition1 %his wold make
demand more elastic and pt downward pressre on prices
• In a 1;4' article in the !ournal of "aw and #conomics$
economist ?ee Lenham reported on the 1;6) prices of
prescription eye&lasses in states that allowed advertisin& for
eye&lasses and eye e"aminations and in states that prohibited
sch advertisin&
•
In states that prohibited sch advertisin&$ the avera&e price of a
pair of eye&lasses was O))
• In states that did not restrict advertisin&$ the avera&e price was
O'6
• %herefore$ at least in this market$ advertisin& fostered
competition and redced prices by more than '9 percent
'8
Malbraith verss Iayek
•
Pohn Qenneth Malbraith:
–
Corporations se advertisin& to create demand for
prodcts that people otherwise wold not want or
need
–
!dvertisin& was distortin& peopleHs preferences away
from pblic &oods and towards private &oods
•
*rederic Iayek:
–
!dvertisin& cannot persade someone to by a
prodct that he or she dislikes
–
#r tastes are often determined by what others tell s1
%here is nothin& particlarly e"ceptional or pernicios
abot the inflence of advertisers
';
!dvertisin& as a si&nal of :ality
•
%he willin&ness of a firm to spend
advertisin& dollars can be a signal to
consmers abot the :ality of the
prodct bein& offered1
)9
Lrand (ames
•
Critics ar&e that brand names case
consmers to perceive differences that do
not really e"ist1
)1
Lrand (ames
•
2conomists have ar&ed that brand names
may be a sefl way for consmers to
ensre that the &oods they are byin& are
of hi&h :ality1
–
providin& information abot :ality1
–
&ivin& firms incentive to maintain hi&h :ality1
•
%he :estion$ however$ is whether brand
name prodcts are better than &enerics by
an e"tent that 6stifies their hi&her prices
)'
%able 1 Monopolistic Competition: Letween
Perfect Competition and Monopoly
))
!ny 5estionsR
).
+mmary
•
! monopolistically competitive market is
characteri7ed by three attribtes: many
firms$ differentiated prodcts$ and free
entry1
•
%he e:ilibrim in a monopolistically
competitive market differs from perfect
competition in that each firm has e"cess
capacity and each firm char&es a price
above mar&inal cost1
)0
+mmary
•
Monopolistic competition does not have all
of the desirable properties of perfect
competition1
•
%here is a standard deadwei&ht loss of
monopoly cased by the markp of price
over mar&inal cost1
•
%he nmber of firms can be too lar&e or
too small1
)6
+mmary
•
%he prodct differentiation inherent in
monopolistic competition leads to the se of
advertisin& and brand names1
–
Critics ar&e that firms se advertisin& and
brand names to take advanta&e of consmer
irrationality and to redce competition1
–
-efenders ar&e that firms se advertisin& and
brand names to inform consmers and to
compete more vi&orosly on price and prodct
:ality1
)4
doc_980462749.ppt