Chapter 15 Flashcards
The Characteristics of Monopolistic Competition?
Monopolistic Competition
- Large numbers of sellers and buyers in a highly competitive market.
- Easy entry of new firms in the long run.
- Sell goods and services that are similar, but slightly different, (Product differentiation)
Examples: Restaurants, Motels, Café’, Hair Salon
The Characteristics of Monopolistic Competition Pt.2
Monopolistically competitive firms
make economic profits by making products that consumers perceive to be different from the products of competitors.
Product differentiation - offering goods similar to competitors’ but more attractive in some ways.
In short run, this allows a firm to behave like a monopolist.
The Characteristics of Monopolistic Competition Pt.3
Product Differentiation
Examples would be:
Physical attributes
Bundles of services offered with the product
Superior location or accessibility
Sales promotion or advertising
Other qualities, real or imagined
e.g. Motel, restaurants: one motel and one restaurant’s service, branding, quality sales promotion might differ from others.
Short-Run Price, Output, and Profit in Monopolistic Competition
They set Q where MR=MC
- If Price (Pe) > ATC, there is Economic profit
- If Price (Pe) < ATC, there is Economic loss
- If Price (Pe) = ATC, there is Normal rate of return ( Breakeven).
What is Monopolistic Competition? Short Run
In short run in a monopolistically competitive market, Elvis’s label will make records up to the point where MR = MC and charge corresponding price on the demand curve
Firm earns profits in this case, but also creates deadweight loss
What is Monopolistic Competition? Long Run
In long run, as firms in the market are earning profits, more firms will enter market with products that are close substitutes
Demand curve will shift to the left
Monopolistically competitive firms operate at smaller-than-efficient scale
Perfectly Competitive
Many sellers and buyers
Price takers
Produce at MR = D =MC
Sell identical products
Easy entry and exit
May earn zero profit in the Long-Run
Horizontal demand curve
Monopolistic competition
Many sellers and buyers
Price makers (set price higher than MR = MC based on willingness to pay)
Produce at MR = MC
Sell differentiated products
Easy entry and exit
May earn zero profit in the Long-Run
Downward slopping demand curve
Advertising?
Main effect of advertising is to provide information about products and prices
More information will increase competition in a marketplace
Firms have incentive to persuade customers that their products aren’t easily substituted with rival product
Advertising portrayal often has little or nothing to do with the product being advertised; intended to make us associate image or emotion with product
Persuade customers that products are more different than they truly are, decreasing consumers’ willingness to substitute, allowing higher markup
Important factor for consumers in assessing the usefulness of advertising as a signal is not the ad’s content, buthow much it cost
More expensive advertising associated with greater firm confidence in good product that will earn repeat business from satisfied customers
Branding?
May be rational for consumers to think of a strong brand as being an implicit guarantee of a product’s quality
Firms with no reputation to protect may have no concern with selling a bad-quality product
A brand may also convey useful information in a confusing situation
Brands may also perpetuate false perceptions of quality or product differences
Monopoly vs. Monopolistic competition?
Monopoly:
Single seller
Price Maker (set price higher than MR = MC based on willingness to pay)
Produce at MR = MC
Sell unique product
Barriers to entry
Positive profit in the Long-Run
Downward slopping demand curve
Monopolistic competition:
Many sellers and buyers
Price makers (set price higher than MR = MC based on willingness to pay)
Produce at MR = MC
Sell differentiated products
Easy entry and exit
May earn zero profit in the Long-Run
Downward slopping demand curve
The Characteristics of Oligopoly?
Small number of firms
Interdependence
- Each seller knows that the other sellers will react to its changes in prices and quantities
- A strategic game of “What will my competitor do if…?”
Barriers to Entry: due to economies of scale, patents and
government regulation and firm created barriers such as lowering price, product differentiation and advertising
Oligopoly: What is a Duopoly?
Duopoly - an oligopoly with two firms
- Monopoly production maximizes profits; at best, two firms could agree to act like a joint monopolist
- Oligopolistic competition does not necessarily drive profits all the way down to the efficient level, due to quantity effect and price effect
Pricing behavior of Oligopoly?
Oligopoly can be explained by game theory.
Best Response Function:
- A reaction of a firm to a change in price, output, or quality made by another competitor.
Cooperative Game:
- A game in which firms get together to collude or fix prices.
Non-cooperative Game:
- A game in which there is no collusive agreements.
Zero-sum game:
- A game in which one player’s losses are offset by another player’s gains; sum totals are zero.
Strategy:
- A rule used to make a choice.
Dominant Strategies:
- When one strategy is always best to choose, regardless of what other players do
Pricing behavior of Oligopoly? Pt.2
Nash equilibrium:
When all players in a game have a dominant strategy
Outcome where all players choose best strategy they can, given the choices of all other players
Can be reached even when firms don’t have dominant strategy
When reached, no one has an incentive to break the equilibrium by changing strategies
Cartel - number of firms colluding to make collective production decisions about quantities or prices
Collusion - act of working together to make decisions about price and quantity
