3.4.3 - Monopolistic competition Flashcards
Define monopolistic competition
- Competition between companies whose products are similar but sufficiently
differentiated to allow each to benefit from monopoly pricing. - A market structure characterized by many buyers and sellers of slightly different
products and easy entry to, and exit from, the industry. - Firms have differentiated products and therefore the demand (average revenue) is not perfectly elastic.
Define non-price competiton
Competing not on the basis of price but by other means, such as the quality of the product, packaging, customer service or some other feature.
Define price-maker
A business with price setting power – seen in imperfectly competitive markets.
Define product differentiation
When a business seeks to distinguish what are essentially the same products from one another by real or illusory means. The assumption of homogeneous products under conditions of perfect competition no longer applies.
State the characteristics of monopolistic competition
- imperfect knowledge
- similar goods, slightly differentiated through quality, branding or advertising
- low/no barriers to entry and exit
- firms can set prices to an extent bc they are producing goods that are slightly different from those of rival firms
- profit maximising firms
- non price competiton
Why is demand curve downward sloping in monopolistic competition
- prod diff occurs due to heavy advertising or real differences in products
- so sellers have some degree of price-making power as they gain brand loyalty
- smaller the prod differences, the more price elastic the demand for each product will be
Why is demand relatively elastic
substitutes for each firm’s products but nto perfectly price elastic
Diff between monopolistic and perfect competition
- product is not homogenous
- demand is no perfectly price elastic
Describe low concentration in monopolistic competition
- concentration ratio tends to be low due to lots of firms operating here
- price changes have negligble effects on demands for rival products
Describe freedom of entry in monopolistic competition
- new entrants can try to differentiate products somehow from existing products and firms enter bc they can see firms in the market making supernormal profit
Diff between monopoly and monopolistic competition
in monopolistic it is assumed that there is free entry into the market so supernormal profits can only be made in the short run
- quantity still occurs at mc=mr to profit maximise
- and then choose price that clears market
Why SN profits in short run only
- product differentiation = can set price above costs to get SN profits
- but low barriers to entry means this SN profit is competed away
How is SN profit competed away
- low barriers to entry mean new entrants join so the established firms demand curve shifts left (demand is split between more firms)
- this continues until only normal profit can be earnt (P=AR=AC). At this point AC curve and demand curve touch tangentially and here, MC=MR
- also as mroe substitutes available, demand curve becomes more elastic
Why are monopolistic firms neither allocatively nor productively efficient
- firms doesn’t produce at lowest point of AC curve in the LR so not productively efficient
- equilibrium price is alos greateer than MC so not allocatively efficient
- but this kind of market structure is stil far more efficient than a monopoly
Evaluate the efficiencies in monopolistic competition
ae: NO, price is greater than MC so output and choice is restriced
pe: no, not min point on ac
de: no SNP not earnt in LR so cant reinvest
BUT realistically
- ae: monop c and monop both lack AE but realistically there is some competiton so price making abiklity is lower so price exploitation is far less than monop and loss in cs is smaller for monop. Homogenous goods in perfect c isn’t ideal bc consumers want choice so we as consumers are willing erode CS for choice so allocative inefficiency of monop C isnt that bad at all
- pe: Nowhere near as bad as monopoly, firms cannot afford to forgoe EOS to the same extent as monopoly. IN pc there arent many EOS at all whereas in Monop c there are so any EOS exploited are to a greater extent than perfect c so prices in monop c are lower than perfect c. consumer Demand for wide range of differentiated goods makes it difficult to achieve eos so thats why product inefficiency in monop c and consumers will stay pay higher price
- DE: maybe there is DE if SR SNP are enough to reinvest or even in a very competitive market we still get DE even if normal profit are being earnt. Comp forces firms to reinvest so they retain market share and stay ahead meaning we still DE even if reinvestment is very small
CHECK CGP 73
