Chapter%2011 - Econ 160, Vardanyan Chapter 11 Market Entry...

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Econ 160, Vardanyan 1 Chapter 11 Market Entry and Monopolistic Competition As we know from our discussion of perfect competition, positive economic profits attract market entry, which causes the price of a product to drop. A monopolist is able to prevent such entry because it has sufficient market power. In this chapter we will study a market setting that represents a hybrid between monopoly and perfect competition. Monopolistic competition is a market that is served by many firms selling slightly different products . Our analysis of monopolistic competition will assume that there are no barriers to entry (in that respect it is similar to perfect competition) and there is no strategic behavior by firms (firms take the actions of their competitors as given). The Effects of Market Entry Suppose first that there is a single producer in the market for toothbrushes (Fig. 11.1). Because the monopolist tries to maximize profit, the optimal output is one at which marginal revenue equals marginal cost. Thus, the optimal number of toothbrushes is where the marginal revenue curve intersects the marginal cost curve (point a ), which corresponds to the economic profit of $330. We have assumed that there are no barriers to entry, so this positive profit will attract competitors. Hence, suppose a second firm that produces nearly identical toothbrushes enters the market. The first firm–the original monopolist–will lose some of its customers,
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This note was uploaded on 05/27/2008 for the course ECON 160B taught by Professor Michaelvardanyan during the Fall '08 term at Binghamton University.

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Chapter%2011 - Econ 160, Vardanyan Chapter 11 Market Entry...

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