Chapter 15 (4) Flashcards
Like any deviation from the equilibrium price & quantity that would prevail under perfect competition –> monopolistic competition is inefficient
► Firms maximize profits at a price that is higher than marginal costs –> and the quantity bought & sold is smaller than it would be under perfect competition
►This means that there is deadweight-loss–the market does not maximize total surplus
Can anything be done about this problem?
► In the Chapter “Monopoly” - we discussed ways that policy makers try to address the welfare costs of monopolies & noted that it is difficult to do so successfully
Unfortunately, regulating a monopolistically competitive market to increase efficiency is even harder
►By definition –> there are many firms in the market & many slightly different products
○ Trying to assess firms’ costs & regulate prices for every single one would be a complicated task
Instead, the government could set a single price for all firms in the market & then let the natural forces of competition take over
►Since monopolistically competitive firms earn zero economic profits –> regulating a lower price would mean that those firms that could not figure out how to produce at a lower cost –> would be forced to leave the market
Such regulation would come w/ a definite cost
►Although consumers would get a greater quantity of similar products at a lower price –> they would also lose out on some product variety
►Instead of dozens/hundreds of similar products aiming to suit consumers’’ different tastes –> everyone would have to make do w/ fewer options
Most governments = not too bothered about the welfare loss from monopolistic competition
Even if they could do something about it –> it is not obvious whether consumers would appreciate having lower prices if they have fewer products to choose from
