Lecture 10 - Monopolistic Competition

Question 1

Monopolistic competition

Answer 1

market structure where barriers to entry are low and many firms compete by selling similar, but not identical products

Question 2

Product group

Answer 2

each firm’s output is differentiated in some way

Question 3

marketing

Answer 3

all of the activities necessary for a firm to sell a product to a consumer

Question 4

brand management

Answer 4

the actions of a firm intended to maintain the differentiation of its product over time

Question 5

What is the economic profit in the long run in monopolistic competition?

Answer 5

zero

Question 6

What are two ways advertising affects demand?

Answer 6

1. makes consumers aware of a product, which decreases search costs and increases demand
2. It makes demand more inelastic by persuading consumers to buy the product because it is “different”

Question 7

Promotions are the opposite of

Answer 7

Branding campaigns

Question 8

Which fare better in the long run? Branding or promotions

Answer 8

promotions

Question 9

Output Effect

Answer 9

Revenue increase due to increase in output sold because of a price reduction

Question 10

Price Effect

Answer 10

Revenue decrease due to a decrease in price in order to sell more output

Question 11

How do you know when the price effect is greater than the output effect due to a cost reduction?

Answer 11

When marginal revenue is negative (crosses the x-axis)

Question 12

What happens when the output effect is greater than the price effect?

Answer 12

Total revenue increases

Question 13

What happens when the price effect is greater than the output effect?

Answer 13

Total revenue decreases

Question 14

The monopolistically competitive firm chooses output such that

Answer 14

MC = MR

Question 15

How do you show profit at the optimal output level graphically?

Answer 15

height of rectangle is price (demand curve) to ATC and length is Q

Question 16

How do you find the profit maximizing price in monopolistic competition?

Answer 16

Where the demand curve is above the optimal level of output (MR=MC)

Question 17

Why do firms in monopolistic competition earn zero economic profit in the long run/

Answer 17

positive economic profits means more firms enter product group, decreasing demand for existing firms until all firms earn zero economic profit

Question 18

In the long run, what is the price for a monopolistically competitive firm?

Answer 18

price=atc

Question 19

When is there zero economic profit?

Answer 19

when demand = atc

Question 20

Is monopolistic competition productively or allocatively efficient?

Answer 20

Neither

Question 21

?Why is monopolistic competition inefficient

Answer 21

There is excess capacity - firms choose output at less than minimum efficient scale, underutilizing available resources

Question 22

How can firms push back the onset of the long run?

Answer 22

1. innovate to reduce costs relative to competitors and benefit from promotions
2. change branding strategies to convince customers that their product is different

Question 23

True or False: market power permits firm to appropriate all of the consumer surplus

Answer 23

False, firms may only appropriate some

Question 24

How do monopolists strategize to further appropriate consumer surplus?

Answer 24

Price discrimination

Question 25

Price Discrimination

Answer 25

the practice of charging different prices to different consumers for similar goods or services (products that cost the same to produce across consumers)

Question 26

What 3 conditions need to be met in order for a monopolist to engage in price discrimination?

Answer 26

1. The firm must have market power (control over price)
2. Firms must be able to accurately determine how demand differs across individuals or groups
3. Firms must be able to segment consumers (must be costly for consumer-to-consumer sales)

Question 27

First degree price discrimination is also known as

Answer 27

perfect price discrimination

Question 28

First degree price discrimination

Answer 28

All consumers are charged a price equal to their respective reservation prices

Question 29

How dies first degree price discrimination affect consumer surplus?

Answer 29

All consumer surplus goes to monopolist, 0 consumer surplus

Question 30

How is perfect price discrimination allocatively efficient?

Answer 30

Output coincides with social optimum, economic surplus is maximized

Question 31

Second degree price discrimination

Answer 31

quantity or quality based price discrimination; different prices are charged for different quality (nosebleed seats) or quantity (bulk discounts) of good or service

Question 32

Block pricing

Answer 32

The practice of charging different prices for different quantities or “blocks” of a good or service

Question 33

Third degree price discrimination

Answer 33

the practice of dividing customers into two or more groups with separate demand curves and charging different prices for each groupe

Question 34

Intertemporal price discrimination

Answer 34

the practice of separating consumers with different demand functions into different groups by charging different prices at different times

Question 35

Example of intertemporal price discrimination

Answer 35

selling the new iphone initially for a higher price for those people who have a more inelastic demand for it, then lowering the price to appeal to a greater market

Question 36

Peak-load pricing

Answer 36

the practice of charging higher prices during peak periods when capacity constraints cause marginal costs to be high

Question 37

cyclical demand

Answer 37

demand that changes in a regular way over time

Question 38

Two-part tariff

Answer 38

A pricing strategy where a firm charges an initial entry fee followed by a usage fee for each unit of a good or service consumed

Question 39

How is the usage fee determined under a two-part tariff?

Answer 39

usage fee = marginal cost