Monopololistic Competition Flashcards
Features of monopolistic markets
Many firms
Similar products
Realistic picture of market structure
Profit maximisers
Free entry and exit
Describe the demand curve for a monopolistically competitive firm
They can increase prices without losing customers as they sell similar products and not the same one
Downward sloping demand curve
Elastic
What happens long term in monopolistic competition
Long terms
New firms will enter if profitable
More demand equals more elastic
Demand curve will fall
What is the short term position for these companies
New firms can enter
Demand curve shifts left
Lower sales = lower profit
Losses encourage companies to leave the market causing a decrease in supply and cause customers to buy from a different market
Firm demand will rise
Amazing the curve more inelastic
What are 2 long run characteristics
Price exceed marginal cost
Due to small market power firm can increase price as they please with our losing customers
Price = average cost
Free entry and exit drives prices to zero
Describe Monopolistic competition be perfect completion
ATC is not minister in mono causing inefficiency in cost
Similar to monopoly price is above marginal cost which cause allocative inefficiency
What strategies are associated with monopolistic competition
Advertising and branding as we’ll as pricing strategies
What are 2 points of argument for and against marketing
Against
- pyschological
- manipulative
Can harm competiton
- costly
For advertising
Informative
Fosters/ encourages competition
Signal quality of product
Describe other pricing strategies
Limit pricing
When they are threatened by those that enter the market
Reduce prices below profit maximising line
Pressures new entrants as market is non longer profitable
Illegal
Predatory pricing
BIG FIRMReduce price below proft maximising
Other smaller firms cannot higher or lower their prices
Forces firms out of the industry
The big firm must be willing to take losses for a period of time
