3.4.3 Monopolistic Competition Flashcards
What is monopolistic competition?
- Monopolistic competition is a form of imperfect competition and can be found in many real-world markets
ranging from sandwich bars and coffee stores in a busy town centre to pizza delivery businesses in a city or
hairdressers in a local area.
How is monopolistic competition similar to perfect competition?
Monopolistic competition is similar to perfect competition, indeed some economists regard it as more realistic,
because the products are differentiated. Product differentiation means that businesses have some control over their products, it implies that firms have
some price-setting power, i.e. the AR curve slopes downwards
What are the key assumptions of monopolistic compeitition?
- Many buyers and sellers – the industry concentration ratio is low
- Perfect information
- Very low barriers to entry/exit – this allows firms to respond to profit signals
- All products are in the same ‘market’ but are slightly differentiated i.e. consumer think that there are some
‘non-price’ differences between products - Firms aim to maximise profit; consumers aim to maximise utility
- Firms have a little price-making power over their own brand
What does the profit maximising equilibrium look like in the short run for monopolistic competition?
What does the profit maximising equilibrium look like in the long run for monopolistic competition?
Explain this diagram of profit maximising equilibrium in the long run
- Unlike monopoly, in monopolistic competition there are no barriers to entry and exit of firms in the long run
- Supernormal profit in the short-run will therefore attract new suppliers offering new products and therefore
only normal profits can be made in the long run equilibrium i.e. where AR = AC - As more firms enter the market, the demand curve for an existing firm shifts to the left as some consumers
opt to buy products offered by new or alternative companies - The demand curve therefore moves to the left until it is tangential to the AC curve. The MR curve will also
shift inwards with the AR curve - At this point, the monopolistically competitive firm is at its profit-maximising level of output (because MR =
MC) but it is also making only normal profit (because AR = AC)
To what extent does monopolistic competition lead to economically efficient outcomes?
- Prices are above marginal cost – meaning that the market equilibrium is not allocatively efficient
- Saturation of the market may lead to businesses being unable to exploit fully internal economies of scale -
causing long-run average cost to be higher – therefore not productively efficient - Critics of heavy spending on marketing and advertising argue that this spending is wasteful and an inefficient
use of scarce resources. - Debate over the social costs of packaging and negative externalities from packaging waste is linked to
monopolistic competition - Monopolistic competition is associated with extensive consumer choice and innovation – this is good for dynamic
efficiency although lower profit margins may reduce the funds available for research and innovation
Firms in retail clothing sector will use a range of different types of non-price competition to drive sales and protect
their market share. List what they include.
- Efficiency and ease of use of online ordering, collection and delivery
- Making clothing available in a wider range of sizes
- Customisation of product e.g. personalisation of tee-shirts and trainers
- Returns policies for customers wishing to bring back purchases
- Outlet shops to offer some excess stock at discounted prices
- Effective use of social media such as Instagram
- Taking steps to address corporate social responsibility including reducing waste associated with fast fashion
Assess the extent to which monopolistic competition leads to economic efficiency. With KAA and evaluation.
