monopolistic competition characteristics (L11)

Question 1

characteristics of monopolistic competition

Answer 1

many small firms
similar goods, slightly differentiated through quality, branding or advertising
low barriers to entry and exit

Question 2

who devised the theory of monopolistic competition

Answer 2

Edward Chamberlin, writing in the USA in the 1930s

Question 3

3 important characteristics of the model of monopolistic competition

Answer 3

product differentiation
freedom of entry
low concentration

Question 4

product differentiation

Answer 4

firms compete by making their product slightly different to build brand loyalty as they face downward sloping demand curves.

Question 5

is demand elastic or inelastic in monopolistic competition?

Answer 5

relatively elastic as there are many substitutes but not perfectly as products aren’t homogeneous

Question 6

freedom to entry

Answer 6

very low barriers to entry

Question 7

low concentration

Answer 7

many firms operating in the industry market=low concentration ratio, a price change by one firm won’t change much for other firms
this is different to oligopoly markets where few firms interact strategically with eachother

Question 8

whats the importance of free entry

Answer 8

profit making attracts new firms which has 2 effects: the new firms will attract some consumers so demand of representative firm shifts left, there are more substitutes so the demand curve becomes more elastic

Question 9

how will more firms entering affect the long run equilibrium?

Answer 9

continual shift left and increase in elasticity. spending on advertising can help keep demand curve downward sloping but pushes up the AC curve

Question 10

evaluate the market outcome under this model

Answer 10

neither productively or allocatively efficient.
if the firm isn’t exploiting the possible economies of scale then product differentiation is damaging to society’s welfare but provides them with more choice.

Question 11

difference between monopolistic and perfect competition when selling products at the going price

Answer 11

monopolistic will want to sell as much as they can at that price, perfect will sell what they want because monopolistic is above marginal cost

Question 12

advertising advantages and disadvantages

Answer 12

excessive advertising=wasteful as higher ac

the need to compete in this way may reduce x inefficiency

Question 13

examples of monopolistic competition

Answer 13

road transport market (taxi companies)

food outlets

Question 14

how can a monopoly firm produce output consistent with allocative efficiency

Answer 14

if they can charge different prices for each consumer depending on how willing they are to pay for the good so demand=MR

Question 15

under what conditions can a firm price discriminate

Answer 15

market power
info on consumers and willingness to pay with identifiable differences between consumers
limited ability to resell the product

Question 16

why is the ability to resell important with price discrimination

Answer 16

if they could they’d engage in arbitrage ( consumers qualified for lower prices buy up product and make profit by reselling to consumers in other segments of the market) so firms can’t sell at high prices anymore