Ch13MC - Chapter 13A: Monopolistic Competition Objectives:...

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Chapter 13A: Monopolistic Competition Objectives: Define and identify monopolistic competition Explain how output and price are determined in a monopolistically competitive industry Explain why advertising costs are high in a monopolistically competitive industry
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PC War Games Globalization brings enormous diversity in products and thousands of firms seek to make their own product special and different from the rest of the pack. Dell, Hewlett-Packard, Lenovo, Acer, and Toshiba accounted for one half of the global market of $60 million PCs in 2006. Firms in these markets are neither price takers like those in perfect competition, nor are they protected from competition by barriers to entry like a monopoly. How do such firms choose the quantity to produce and price?
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What Is Monopolistic Competition? Monopolistic competition is a market with the following characteristics: A large number of firms. Each firm produces a differentiated product. Firms compete on product quality, price, and marketing. Firms are free to enter and exit the industry.
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What Is Monopolistic Competition? Large Number of Firms The presence of a large number of firms in the market implies: Each firm has only a small market share and therefore has limited market power to influence the price of its product. Each firm is sensitive to the average market price, but no firm pays attention to the actions of the other, and no one firm’s actions directly affect the actions of other firms. Collusion, or conspiring to fix prices, is impossible.
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What Is Monopolistic Competition? Product Differentiation Firms in monopolistic competition practice product differentiation , which means that each firm makes a product that is slightly different from the products of competing firms.
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Competing on Quality, Price, and Marketing Product differentiation enables firms to compete in three areas: quality, price, and marketing. Quality includes design, reliability, and service. Because firms produce differentiated products, each firm has a downward-sloping demand curve for its own product. But there is a tradeoff between price and quality.
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This note was uploaded on 04/03/2009 for the course ECON 2102 taught by Professor Bill during the Spring '08 term at Temple.

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Ch13MC - Chapter 13A: Monopolistic Competition Objectives:...

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