Chap. 9 - Monopolistic Competition Flashcards
What are the characteristics of Monopolistic Competition?
Large number of firms, low barriers to entry, similar products, limited market power, non-price competition
So how can a firm in monopolistic competition, differentiate their product?
The more a firm is able to differentiate its products from those of competitors, the greater its ability to set the price above marginal cost. If the market niche is too narrowly defined, the firm may not be able to attract enough customers; too broad and the firm faces greater competition. Product differentiation can be real or perceived.
What is real product differentiation?
The product is different from competitors by physical features, services, method of production.
What is perceived product differentiation?
The product is not different, but only an image that it is. Usually conducted through celebrity endorsements, and advertising.
If a firm is making economic profits in a monopolistic competition structure, what will happen?
Other firms will enter the market, since barriers to entry are low, and drive profits to zero.
Why is the demand curve not completely elastic?
Products that firms are selling are similar but still differentiated.
In the long run economics profits in monopolistic competition will be ___? Explain the graph.
Zero. The average cost curve just touches the demand curve in one spot (i.e. it is tangent to it). This will happen exactly at a quantity where marginal revenue equals marginal cost (Pmc, Qmc). If a hotel offers a swimming pool and attracts more customers, other hotels will follow suit.
In monopolistic competition firms are neither productive or allocative efficient. Why?
. Firms in monopolistic competition are not productively efficient since they are not producing at the minimum average cost. Firms have excess capacity, which is the difference between the profit maximizing quantity and the productively efficient quantity that would allow them to produce at the lowest average cost.
Firms are also not allocatively efficient since price is greater than the marginal cost on the last unit produced.
What are the characteristics of an oligopoly?
Few large firms, Standardized or differentiated products, high barriers to entry, interdependent market power, non-price competition.
What is the Herfindahl-Hirschman Index? How would you calculate the index if there are 5 firms with each firm having 20% of the market?
The index measures the amount of firm concentration in the market. An industry in pure competition would have a very low concentration ratio. Industries in monopolistic competition typically have a concentration ratio less than 40, while oligopolies have a ratio greater than 40, such as the airline manufacturing industry.
20^2 + 20^2 + …. = 2000
Score over 1800 is highly concentrated.
For a non-collusive oligopoly why is there a kinked demand curve?
If the firm were to raise its price, other firms would choose not to increase their price and would take a large portion of the market share away from the higher priced firm. Thus the demand curve, if the price is increased is very elastic. If the firm decided to decrease its price, other firms would follow the price cut and decrease their price. Thus the demand would be relatively inelastic.
What is Game Theory?
Where you are trying to make the best choice based on what you think will be the actions of others.
What is the Nash Equilibrium?
Nash Equilibrium is not the payoffs the two firms get, it is the optimal strategies of the firms (high output, high output)
