Monopolistic Competition Flashcards
Features of Monopolistic Competition
Many small firms
Similar goods, slightly differentiated through quality, branding or advertising
Small barriers to entry and exit
Firms can set price to an extent because they are producing goods that are slightly different from those of rival firms
What does Monopolistic Competition describe
A market in which there are many firms producing similar, but not identical, products
Examples of Monopolistic Competition Markets
Hairdressers, Fast Food Outlets, Vape Shops
Model Characteristics of Monopolistic Competition
Product Differentiation
Freedom of Entry
Low Concentration
Describe Product Differentiation in Monopolistic Competition
Each firm competes with the others by making its product slightly different
Allows firm to build up brand loyalty amongst regular customers - gives them some influence over price
Likely firms will engage in advertising to maintain brand loyalty - heavy advertising is a common characteristic of a market operating under monopolistic competition
Substitutes for each firms product - demand is relatively price elastic
Product is not homogenous
Describe Freedom of Entry in Monopolistic Competition
Very low or no barriers to entry into the market
Firms are able to join the market if firms are making supernormal profit
New entrants will be looking to differentiate their product slightly from the others
Describe Low Concentration in Monopolistic Competition
Concentration ratio in the industry tends to be low - many firms operating in the market
Price change by one of the firms will have negligible effects on the demand for its rivals’ products
What would induce a monopoly to expand output
When it’s making supernormal profit
How does price discrimination work in monopolistic competition
A monopolist is able to charge a different price to each individual consumer - they are price makers to an extent
Able to charge each consumer a price that is equal to their willingness to pay for the good
Demand curve effectively becomes marginal revenue - represents the amount that the monopolist will receive for each unit of the good
Consumer surplus represents monopolists profits
Necessary Conditions for Price Discrimination
Price Making Power - The firm must have a degree of monopoly power
Information - The firm must be able to identify different groups of consumers with differing price elasticities of demand
Limited / No Ability to Resell
What are the different types of price discrimination
First, Second and Third Degree
What is First Degree Price Discrimination
Firms charge the maximum price consumers are willing to pay
All consumer surplus becomes a firm’s profits
What is Second Degree Price Discrimination
Firms charge different prices based on the quantity of a good or service they buy
What is Third Degree Price Discrimination
When different groups of consumers are charged different prices for the same good or service
Why is Market Power an important factor of Price Discrimination
Price Discrimination is not possible in a perfectly competitive market - only possible when firms have some ability to vary the price
