5.6 Monopolistic Competition Flashcards
What does monopolistic competition fall between?
Perfect competition and oligopoly
What is monopolistic competition known as?
Imperfect competition amongst the many
What does monopolistic competition resemble?
-monopolies and perfect competition
How does monopolistic competition resemble perfect competition?(4 asp)
-large number of firms in the market
-no barriers to exit and entry in the long run
-normal profit made in the long run(supernormal is decreased)
-many producers and consumers
How does monopolistic competition represent monopolies?(3 asp)
-downward sloping demand curve(slightly different product), goods are partial but not perfect substitutes for each other, they are partial substitutes(product differentiation)
-firms can raise prices and not loose all consumers (price setting powers)
-differentiated products
-each firms MR curve is below ARcurve (ar=demand curve)
What is short-run profit maximisation similar to and why?
Monopoly because there are supernormal profits in the short run
Describe short run profit maximisation of a monopoly?(2 aspects:
-demand curve (MR)is more elastic than it would be in a monopoly
-demand curve (or ar) represents demand for goods produced by one firms rather than the whole market
Describe long run profit maximisation?
-entry of a new firm causes demand curve to shift inward
-inward shift due to partial substitutes attracting consumers away from existing firms
-profit maximising MR=MC
-long run profit maximisation is achenved when AR firms tangent to ATC curve removing abnormal profits
What does the market mechanism do to monopolistic competition in the long run?
Eliminates abnormal profits and brings in a profit maximising price (P=ATC)
When is monopolistic competition both productively and allocatively inefficient?
In the absence of any economies of scale
What does the productive inefficiency in a monopoly take form as?
Excess capacity
What is excess capacity measured by?
Difference between the profit-maximising level of output and the productivity efficient level of output
Why must firms in perfect competition be productively efficient?
Because if they don’t produce on the lowest point of the ATC curve they won’t make normal profits
(This forces them to eliminate unneeded costs)
What does product differentiation do for a consumer?
Increases the range of choice available to the consumer
Due to product differentiation it is commonly believed that monopolistic competition improves ….
Economic welfare
When does product differentiation stop according to Kelvin Lancaster?
Until the gain to the consumer from having to produce a new product = the loss of having to create a new product for the market
What is advertising divided into?
-persuasive advertising
-informative advertising
What does informative advertising do?
Increases competition because it provides consumers and producers with useful information about the different goods that different firms are producing
What does persuasive advertising do?
Reduces competition and makes demand curve less elastic
Reduces competition “in effect consumers are unwilling to provide a cheaper substitute good”
What does persuasive advertising attempt to do?
Persuade people that the product is a must-have product(little information about the good is provided) e.g it’s price
-instead the focus on how ownership of the product will improve consumers feelings or their image portrayed to other people
What does persuasive advertising go hand in hand with?
Saturation advertising
What do monopolies use saturation advertising for?
To prevent other firms entering the market
Why does saturation advertising prevent smaller firms from entering the market?
They are unable to afford the minimum level of advertising and other forms of promotion
(This is needed to persuade retailers to stock their products)
When does price competition take place?
When a firm reduces prices to sell more of its good
What two ways can increases sales occur in?
-switch from markets where prices are higher
-switch from buying good from rivals in the sake market
What 3 ways can firms undertake price competition?
-limiting prices
-predatory prices
-special offer prices
What is special offer pricing?
Discounted prices for a limited time only
In the absence of price competition what are firms in monopolistic competition and oligopoly likely to do?
Undertake non price competition
What are the 3 types of non price competition?
-marketing competition (obtaining exclusive outlets where oil companies sell their products)
-persuasive advertising and production differentiation
-quality competition (provision of point-of-sale and service and after-sales service
Diagram for short run-profit maximisation in monopolistic competition
Describe this diagram?
Also why is it different to a monopoly
Profit maximisation at A and profits shown in rectangle C1 D B P1
-different as AR curve is for a firm not the whole market and other firms in the market produce partial (not perfect substitutes)-more elastic than a pure monopoly
Diagram for long-run profit maximisation in monopolistic competition?
Describe this diagram?
-there is an absence of barriers to entry in monopolistic competition
-causes inward shift of AR curve from the introduction of substitute products
-achieved when AR curve forms a tangent with the ATC curve (removing abnormal profit)
-only normal profit is made
What are both total sales revenue and total costs of production shown by?
Rectangle O Q1 B P1
