Chapter 17- Monopolistic Competition Flashcards
Market structure in which
A large number of firms compete
Each firm produces a differentiated product
Firms compete on price, product equality, and marketing
Firms are free to enter and exit
NO BARRIERS TO ENTRY, so the firm cannot make economic profit in the long run
Monopolistic competition
Making a product that is slightly different from the products of competing firms
A differentiated product has close substitutes but not perfect substitutes
Product differentiation
Two indexes:
The four-firm concentration ratio
The Herfindahl-Hirschman index
Identifying monopolistic competition
The percentage of the value of sales accounted for by the four largest firms in the industry
Ratios:
0=perfect competition
100= monopoly
>60= oligopoly
<40= competitive market- monopolistic competition
Four-firm concentration ratio
The square of the percentage market share of each firm summed over the largest 50 firms in a market
Ex: if four firms have market shares of 50%, 25%, 15%, and 10%, then the HHI= (50)^2 + (25)^2 + (15)^2 + (10)^2=3450
If HHI is less than 1000, market is competitive
If in between 1000 snd 1800, market is moderately competitive
Herfindahl-Hirschman index
If the quantity a firm a produces is less than the quantity at which ATC is a minimum
Produces less than the efficient scale
Excess capacity
Quantity of production at which the average total cost is a minimum
Efficient scale
Amount by which price exceeds marginal cost
Markup
Advertising costs are fixed costs
Advertising costs decrease as production increases
Average total cost increases with more advertising
# of firms in the market might increase with more advertising
More advertising makes demand more elastic
Selling costs and total costs
An action taken by an informed person or firm to send a message to uninformed people
Profitable to signal high quality and deliver it
Unprofitable to signal high quality and not deliver it
Ex: brand names signal high quality
Signal
