Section 11 Flashcards
Monopolistic Competition
Large number of firms with low barriers to entry.
Each product is unique, but very similar to others.
Limited degree of market power, no mutual interdependence among firms, so each acts independently.
Highly elastic demand curve due to close substitutes, but not perfectly elastic due to product differentiation.
Non-price competition and advertising, compete on features, not just price.
Niche Market
Appealing to a small segment of the market, generally done as differentiation.
Focus on meeting the needs of a particular market segment.
Product Differentiation
Can be real or perceived.
Used to set price above marginal cost.
Focuses customer on features instead of price.
Real Product Differentiation
- Physical characteristics such as liquid gel tablets.
- Location product, like close to freeway, etc.
- Features it provides, like free delivery or setup.
- Method of production, recycled goods
Perceived Product Differentiation
- Advertising
2. Celebrity endorsement
Trick of Advertising
Tells you the opposite of what the advertiser thinks.
Monopolistic Competition in the Short Run
May earn profit or losses.
MR = MC (if price is above average variable cost)
Entry will shift the demand left and become more elastic.
MR will be less than demand
Monopolistic Competition in the Long Run
Not perfectly elastic so long-run will not equal minimum average total cost.
Will have a normal profit.
MR will be less then demand
Productively Efficient
Not productively efficient since they produce less product at a higher price and they are not producing at minimum average cost.
Have excess capacity which is the difference between profit maximizing quantity and productively efficient quantity.
Allocatively Efficient
Not efficient since price is greater than the marginal cost on the last unit produced.
Law of One Price
Says that there should be one price for a commodity if transaction costs were zero.
Perfect Information
You know exactly what the price is everywhere.
High-Lo Pricing
A firm lowers the price of certain goods for a period of time to attract customers.
Can be a loss leader for a group of products, in hopes to get market share or to get them to buy higher priced goods.
Every-day Low Prices
Keep prices slightly above wholesale cost, rarely have sales.
Price Discrimination
Charging different prices to different consumers based on their willingness to pay. Conditions: 1. Must be able to set price 2. Must be able to segment market 3. Prevent resale of product
Surplus
Firms extracts all consumer surplus, remove all deadweight loss for profit.
First Degree Price Discrimination
AKA - Perfect Price Discrimination
Firm charges each consumer their maximum willingness to pay.
Output is MR = MC, and charge MR = Price for each consumer.
Will be allocatively efficient because price equals marginal cost at the last unit.
Firm extracts all surplus, no consumer surplus.
Very difficult to implement, examples are lawyers, auctions.
Second Degree Price Discrimination
AKA Block Pricing
Can’t perfectly identify segment of consumers, but he knows two more more groups with different willingness to pay. Don’t know who belongs to what group.
Different prices are charged based on quantity consumed. Willing to buy more for a lower price, even though it might be more then they need, because it looks like a good deal.
Third Degree Price Discrimination
Can’t perfectly identify segment of consumers, but he can identify groups that have similar demands and can segment them based on characteristics such as age, location, etc.
Most common.
Charge a higher price to consumers with the most inelastic demand, while elastic consumers get the lower price.
Two-Part Tariff
Charges individuals upfront membership fee and then charges a per-use fee.
Can allow for price discrimination as well.
Per-use fees covers marginal cost.
Membership fee extracts all consumer surplus.
Product Differentiation Examples
- Product Attributes
- Service
- Location
- Brand name and packaging
- Control over price
Four-firm concentration Ratio
Output of four largest firms divided by total output of industry.
Low in competitive industries.
High in oligopoly or monopoly.
Herfindahl Index
Sum of the squared market percentage share of all firms.
Single firm industry is 10,000
Excess Capacity
Plant and equipment is underutilized because they are producing less then minimum atc.
Product Variety
The greater the product differentiation the greater the excess capacity and the greater the productive inefficiency.
