Monopolistic competition Flashcards
What is the formal diagrammatic analysis of the monopolistically competitive model in the short and long run?
In the short run, firms in monopolistic competition can earn supernormal profits or incur losses. The firm maximizes profit where marginal cost (MC) equals marginal revenue (MR). In the long run, the entry and exit of firms lead to a situation where firms make normal profits, and the market reaches equilibrium
What are the main characteristics of monopolistically competitive markets?
1)Many buyers and sellers: Numerous firms operate in the market, each with a small market share.
2)Product Differentiation: Firms offer products that are similar but not identical, allowing for some degree of market power.
3)Low barriers to Entry and Exit: Firms can enter or exit the market with relative ease, leading to normal profits in the long run.
4)Non-Price Competition: Firms engage in strategies other than price competition, such as advertising and product differentiation, to attract consumers.
5) Firms are profit maximisers
How do firms in monopolistically competitive markets engage in non-price competition?
1)Product Differentiation: Developing unique product features, quality improvements, or branding to distinguish their offerings
2)Advertising and Promotion: Utilizing various marketing strategies to build brand recognition and loyalty among consumers
What are the arguments on monopolistic competition?
1) Are super normal profits made in the short run enough to be dynamically efficient?
2) Can firms afford EOS if products are differentiated (you can’t bulk buy differentiated products as easily
What is the concentration ratio? (Market structures)
The collective market share of the largest firms in an industry
Evaluation of Monopolistic Competition
1)Dynamic Efficiency: Firms innovate to differentiate products, but limited supernormal profits may restrict long-term investment.
2)Short-Run Supernormal Profits: Firms can earn supernormal profits initially, but new entrants erode these over time.
3)Economies of Scale (EOS) vs. Diseconomies of Scale (DEOS): Firms often operate below optimal scale, resulting in higher average costs.
5)Price Discrimination: Limited due to close substitutes and low barriers to entry.
6)Competition: High competition based on product differentiation and marketing.
7)Natural Monopoly: Unlikely, as many firms prevent market dominance.
8)Types of Goods or Services: Consumer goods like clothing and restaurants, offering variety and choice.
