Monopolistic Competition Flashcards
Monopolistic Competition
1) Market structure where many firms sells similar BUT NOT IDENTICAL products
many sellers/buyers BUT not identical products
Characteristics of monopolistic competition
1) many sellers
2) product differentiation
3) free entry + exit
Demand curves for monopolistic competitive
1) Demand curve slopes down (since product differentiation)
2) follows monopolist’s rule for profit maximization –> quantity at MC=MR but charge at demand curve
3)
Long-run equilibrium
1) Price exceeds marginal cost
2) price equals average total cost
3) in long run –> profit is 0
Excess Capacity
1) monopolistically competitive could increase quantity produced + lower ATC –> BUT they don’t since it’s more profitable to operate w. excess capacity at MC=MR
Markup over Marginal Cost
1) Price exceeds marginal cost in monopolistically competitive firms
2) monopolistically competitive firms ALWAYS want more customers –> know they make a profit
Undesirable outcome for society from monopolistic competition
1) Monopolistically competitive: because of markup –> deadweight loss of monopoly
2) trying to fix it –> adding subsidies would cause its own DWL so policymakers just live with inefficiencies of monopolistic competition
Why are there too few or too many firms in monopolistic competition
1) product variety externality: new products give benefit to consumers –> entry of new firm gives positive externality
2) business-stealing externality: other firms lose from new competitors entering –> new firm entering imposes negative externality on firms
When do new firms enter monopolistically competitive markets
1) price > ATC
Critique of advertising
1) Argue that it manipulates people’s tastes because it is psychological instead of informational
2) Argue that it impedes competition –> tries to convince consumers that products are more different than they really argue
Defense of Advertising
1) Use advertising to inform consumers
2) fosters competition –> makes customers more aware of different products + price differences –> reduces market power of each firm
3) Signal of Quality –> shows consumers that the producer knows its product is great so willing to spend a lot of money to advertise
Con of brand names
1) brand names make consumers perceive differences that don’t actually exist
2) generic is almost as good as brand-name BUT ppl think brand names are better
Pro of brand names
1) gives consumers information about quality when difficult to judge
2) brand name firms have incentive to maintain high quality
