Monopolistic Competition Flashcards
What are the characteristics of monopolistic competition?
Many buyers and sellers
Slightly differentiated goods so firms are price makers and theres price elastic demand.
Low barriers to exit/entry
Good information
Non-price competition
Firms are profit maximisers
What do companies compete in?
They compete in branding, ads, quality, and more
How do firms behave in the short run?
In the short run, firms act like monopolies since they are selling something relatively unique. So they have price making abilities and are profit maximisers.
They will make SNP in the SR.
What happens in the long run?
The SNP from the SR attracts firms and they can enter due to low barriers and good info.
They will erode the profits. Demand for individual firms will shift left as consumers are shared amongst a larger number of firms.
Demand will shift until AR=AC, which is normal profit.
Evaluation of Monopolistic Competition
Theres no allocative efficiency since p>mc in the LR. Consumers are exploited, less choice, less output, high prices.
Theres no productive efficiency. Firms are not operating at the lowest point of their AC. They are voluntarily foregoing EoS.
Theres no dynamic efficiency. Sinces theres no SNP in the LR, firms cant invest.
How can it be argued that monopolistic competition may actually be the best in real life?
Allocative efficiency.
Sinces theres comp, price making ability wont be as strong so it wont be as bad as monopoly markets.
Also, since products are differentiated, consumers dont mind paying a little extra for the differentiation. So allocative inefficiency here may be good.
Productive efficiency.
Since theres slightly differentiated goods, there may be substitutes meaning firms may not be able to forego EoS. This is better than monopolies.
Perfect comp, theres PE. But in perfect comp theres not as much EoS unlike monopolistic. Any EoS used here may be of greater significance.
PI may be expected. Sinces theres differentiated goods, its much harder to exploit EoS. Therefore, PI is fine.
Dynamic efficiency.
Maybe there can be DE. Profits overtime may be enough for DE. DE may be needed for a firm in order to actually compete and survive in the markets.
