ECON 5311 Chapter 10 - LECTURE SESSION FIVE This is the...

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LECTURE - SESSION FIVE This is the shortest lecture in the whole course and completes the objectives represented in the two undergraduate "principles" courses that are foundational for the MBA program. The two imperfect market models will be familiar to most students because, in reality, most firms and industries are more characteristic of oligopoly or monopolistic competition than the perfect markets. "The Pharisees heard that Jesus was gaining and baptizing more disciples than John, although in fact it was not Jesus who baptized, but his disciples." (John 4:1-2) Jesus was frequently angry that the Pharisees viewed the temple and their calling as a competitive business. CHAPTER 10 - MONOPOLISTIC COMPETITION AND OLIGOPOLY MONOPOLISTIC COMPETITION - A market structure characterized by a large number of firms selling products that are close substitutes, yet different enough that each firm's demand curve slopes downward. The firms that populate this market are not price takers, as they would be under perfect competition, but they are price searchers. When a firm engages in product differentiation, it is expected that the cost of differentiation can be included in the price without a negative effect on volume. Obviously, real product innovations, advertising, service, warranties, premier locations, additives, packaging, or any of the things that may make a product more attractive to the consumer, are not inexpensive. Sellers can differentiate their products in four basic ways: Physical Differences, Location, Services, and Product Image. Differentiation can create inelasticity by creating brand loyalty and reducing the closeness of substitutes. It should be remembered that product differentiation may be merely perceived and does not have to be real. Bayer aspirin is "100% pure" and, if this means pure aspirin, then so are the other generic aspirins "100% pure." Bayer is priced higher because of the perception of product differentiation. A firm's demand will be more elastic the greater the number of competing firms and the less differentiated the firm's product. Because of the ease of entry, monopolistically competitive firms will earn no economic profit in the long run. With zero economic profit, no new firms enter, so the industry is in long-run equilibrium.
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