Chp 13 - monopolistic competition Flashcards
what is a monopolistic competition?
a market structure in which:
1. a large number of firms compete
2. each firm produces a differentiated product
3. firms compete on product quality, price and marketing
4. firms are free to enter and exit the industry
what’s the 3 implications for each individual firm in the industry in a monopolistic competition
- small market share - each firm supplies a small part of the total industry –> thus each firm has only limited power to influence the price of tis product as firm’s price can deviate from the average price of other firms by a relatively small amount
- ignore other firm - a firm must be sensitive to the average market price of the product, but the firm does not pay attention to any one individual competitor –> all firms are relatively small so no one firm can dictate market conditions and the actions of no one firm directly affect the actions of the other firms
- collusion impossible - firms would like to be able to conspire to fix a higher price (collusion) but bc the number of firms is large, coordination is difficult and collusion is not possible
define product differentiation
a firm makes a product that is slightly different from the product of competing firms and is a close substitute for the products of the other firms
product differentiation allows firms to compete with other firms in which 3 areas? and how?
- quality - physical attributes that make it different from the products of other firms (design, reliability, services provided to buyer, buyer’s ease of access to the product)
- price - firms can set its price and output - tradeoff between price and product’s quality
- marketing - firm must market its product - advertising + packaging
does a firm in monopolistic competition make economic profit in the long-run? why?
they cannot make an economic profit in the long-run bc in the long-run firms neither enter nor leave the industry (as monopolistic competition have no barriers to prevent new firms from entering the industry in the long-run)
how of economists measure whether a market is sufficiently competitive to be classified as monopolistic competition
measure of concentration
what are the 2 main measures of concentration
- the 4-firm concentration ratio
- the Herfindahl-Hirschman Index
define the 4-firm concentration ratio? what does a low or high concentration ratio mean?
the percentage of the total revenue accounting for by the 4 largest firms in an industry - main measure used to assess market structure
a low concentration ration indicates a higher degree of competition and vice versa
what does a concentration ratio of 60% or more in the 4-firm concentration ration mean?
60% - a market that is highly concentrated and dominated by a few firms
less than 60% - an indication of a competitive market
define the herfindahl hirschman index (HHI)
the square of the percentage market share of each firm summed over the largest 50 firms in a market
in perfect competition, herfindahl-hirschman is ___
small
what’s the HHI value of a monopoly
10,000 (100^2 * 1)
when is a market regarded as being competitive in HHI values?
1,500-2,500
what’s the market for an HHI that exceeds 2,500
being concentrated and uncompetitive
describe an oligopoly in term is HHI and concentration ratio
a market with a high concentration ration and high HHI
what are the limitations of a concentration measure? explain
- geographical scope of the market - concentration measures take a national view of the market - many goods are sold in a national market but some are sold in a regional or global market
- barriers to entry and firm turnover - some market are highly concentration (entry = easy and large firm turnover rate) and a market with a few firms might be competitive because of potential entry
- market and industry correspondence - markets do not always correspond closely to industries bc 1. markets are often narrower than industries 2. most firms make several products
how does a firm in monopolistic competition look at deciding profit-maximizing/loss minimization and quantity?
where MC = MR, and the price of ATC and demand curve correlate - similar to a single priced monopoly
produces the quantity at which MR = MC and then charges the price that buyers are willing to pay for that quantity as determined by the demand curve
what happens in the long-run for firms in monopolistic competition
they make zero economic profit
what are the 2 difference between monopolistic competition and perfect competition
- excess capacity
- markup
when does the firm have excess capacity
if the firm produces less than its efficient scale - the quantity at which ATC is at minimum
fill in the blank: ATC is the lowest possible cost only in _______ competition
perfect
what is a firm’s markup
the amount by which price exceeds marginal cost
what does the markup between price and marginal cost in monopolistic competition arise from?
product differentiation
describe the relationship between benefit and value
the benefit of a good would be less if there’s less variety since people value variety but variety is costly
define setup costs
initial costs of design and marketing
what’s the efficient degree of product variety
the MSB = MSC of the product
fill in the blanks: the loss that arises bc the quantity produced is ____ than the efficient quantity is ____ by the gain that arises from having a greater degree of product variety
less, offset
is monopolistic competition efficient?
perhaps
how does a firm in monopolistic competition maintain economic profit
- develop an entirely new product
- develop a significantly improved product that provides it a competitive edge (temporarily)
what’s the marginal cost of product development
the marginal dollar spent on developing a new or improved product
what’s the marginal revenue of product development
the marginal dollar that the new or improved product earns for the firm
what does it mean when:
(1) MR> MC of product development
(2) MR<MC of product development
(3) MR = MC of product development
- at a low level of product development
- at a high level of product development
- the firm is undertaking the profit-maximizing amount of product development
in a monopolistic competition is the profit-maximizing amount of product development the efficient amount?
no, as the marginal revenue is less than the price in a monopolistic competition, so product development is not pushed to its efficient level.
monopolistic competition brings many product changes that cost little to implements and are purely cosmetic - improvement to products are not as good as the consumer would like and for which the consumer is willing to pay a higher price
how do firms differentiate their products when the difference is small in a monopolistic competition
- advertising
- packaging
how does advertising expenditures affect the profits of the firm?
- they increase costs
- they change demand
why do firms incur huge costs in monopolistic on selling the product?
to ensure that buyers appreciate and value the differences between their own products and those of their competition
are selling cost a fixed cost?
yes
what’s the relationship between selling costs and a firm’s total cost?
selling costs increase the firm’s total cost
selling costs per unit ___ as the quantity produced increases
decreases
how does selling costs affect demand?
may initially increase the demand for a firm, and then the number of firms in the market might increase which leads to advertising decrease the demand faced by any one firm –> the demand for 1 firm’s product more elastic
advertising can lower ATC and lower the markup and price
define a signal in advertising
an action taken by an informed person (of firm) to send a message to uninformed people
why does a firm spend a lot of money promoting a brand name
brand name provides info to consumers about the quality of a product and is an incentive to the producer to achieve a high and consistent quality standard
