3.5.6 - Monopolistic Competition Flashcards

1
Q

Why is monopolistic competition particularly interesting?

A

It resembles both perfect competition and monopoly.

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2
Q

How does monopolistic competition resemble perfect competition?

A

Large number of firms in the market.
No barriers to entry / exit in the long run.
Firms are attracted by supernormal profit in the short-run and compete away supernormal profit for others.

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3
Q

How does monopolistic competition resemble a monopoly?

A

Each firm faces a downward-sloping demand curve.
Each firm produces a different, non-homogeneous good which are partial but not perfect substitutes of one another.
The marginal revenue curve is below the average revenue curve which is the demand curve.
Firms have price setting powers.

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4
Q

What does the demand curve represent in monopolistic competition?

A

Demand for the output of the whole market rather than just one firm.

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5
Q

What is different about the gradient of the demand curve in a monopoly compared to monopolistic competition?

A

The demand curve of a firm in monopolistic competition are more elastic than in a pure monopoly.

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6
Q

Why can firms in monopolistic competition markets not make supernormal profit in the long-run?

A

The lack of entry/exit barriers cause firms to enter or leave the market in periods of supernormal or subnormal profit so firms make normal profit in the long-run.

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7
Q

What happens in the long-run of firms in monopolistic competition markets?

A

The demand curve shifts leftward as firms enter the market.

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8
Q

When is long-run profit maximisation achieved in monopolistic competition markets?

A

When AR = ATC.

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9
Q

Where is long-run profit maximisation achieved on this graph?

A

At point B.

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10
Q

What happens when AR touches the ATC curve?

A

All abnormal profit has been removed, and the firm has maximised long-run profit.

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11
Q

What happens in monopolistic competition in terms of efficiency?

A

Firms are both productively and allocatively inefficient.
P > MC and the firm produces above the lowest point on its ATC curve.

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12
Q

Why do monopolistically competitive firms not produce at the lowest point on their ATC curve?

A

There are no economies of scale to take advantage of.

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13
Q

What does not producing at the lowest point on an ATC mean for monopolistically competitive firms?

A

This is productive inefficiency, and takes the form of excess capacity, measured by the difference between Q1 and Q2.

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14
Q

What must monopolistically competitive firms do in the long-run to ensure normal profits are made?

A

Unnecessary costs must be eliminated, or normal profits will not be made.

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15
Q

Why do monopolistic firms need to remove unnecessary costs in the long-run?

A

If they are not removed, subnormal profits will be made due to new firms entering the market in monopolistic competition.

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16
Q

Why do some economists think monopolistic competition improves economic welfare?

A

The level of product differentiation outweighs the loss in productive efficiency seen in other market types. Consumers may value a wider choice above the increases in productive efficiency.

17
Q

What did Kelvin Lancaster claim monopolistic competition does?

A

The number of differentiated products increases until the gain for consumers in choice is equal to the loss of producing less existing goods at a higher cost.

Essentially, he argued that monopolistic competition does not lead to economic waste.

18
Q

How can advertising be divided?

A

Informative advertising
Persuasive advertising

19
Q

What is informative advertising?

A

Provides consumers with useful information about goods and services which are available to buy.

20
Q

What is persuasive advertising?

A

Attempts to make people think it’s a ‘must-have’ product. However, little information about the good itself is given.

21
Q

What often follows persuasive advertising?

A

Saturation advertising.

22
Q

Who uses saturation advertising and why?

A

Monopolies, because it prevents smaller firms from entering the market as they cannot afford the minimum level of advertising necessary for retailers to stock their products.

23
Q

Why is information advertising used?

A

It increases competition in a market.

24
Q

What is price competition?

A

A firm reducing prices in order to sell more of a good or service.

25
Q

How do increased sales occur?

A

Consumers switch from other markets where prices are higher and buy this good instead.
Consumers switch from buying similar goods in the same market to buy the cheaper substitute.

26
Q

Why do some argue that monopolies do not partake in price competition?

A

It is self-defeating, as monopolies produce 100% of market output so they would only help consumers.

27
Q

Why do monopolies partake in price competition?

A

Limit pricing and predatory pricing both exist to maintain a monopolies supernormal profit in the long-run.

28
Q

How and why do firms in monopolistic competitive markets or competitive oligopolies partake in price competition?

A

The most common form is special offer pricing.

Increases short-term sales which should theoretically increase revenue and therefore profit from the increased sales.

29
Q

How else can firms gain market share or protect existing sales other than price competition?

A

Non-price competition.

30
Q

What is non-price competition?

A

A producer attempts to increase sales by changing factors other than price.

31
Q

What can non-price competition include?

A

Marketing competition
Persuasive advertising
Quality competition

32
Q

What is marketing competition?

A

Claiming your good is superior through advertising campaigns.

33
Q

What is quality competition?

A

Giving benefits that competitors do not after purchasing the good.

34
Q

What can monopolistic competition be described as?

A

Imperfect competition among the many.

35
Q

What types of efficiency do firms in monopolistic competition exhibit?

A

Dynamic efficiency.