Ec100A Ch12

Ec100A Ch12 - 12 &13 MONOPOLISTIC COMPETITION,...

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MONOPOLISTIC COMPETITION, OLIGOPOLY, COLLUSION, AND GAME THEORY 12 &13
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Overview: Monopolistic Competition and Oligopoly monopolistic competition Market in which firms can enter freely, each producing its own brand or version of a differentiated product. oligopoly Market in which only a few firms compete with one another, and entry by new firms is impeded. cartel Market in which some or all firms explicitly collude, coordinating prices and output levels to maximize joint profits. Econ 100A Mortimer Product Differentiation Number of Firms Many Few One Dominant One Firms produce identical products Perfect competition Homogeneous products oligopoly (e.g., U.S. salt market, DRAM) Dominant firm (e.g., light bulbs- GE) Monopoly Firms produce differentiated products Monopolistic competition (e.g., physician services, video rentals) Differentiated products oligopoly (e.g., U.S. cola market) N/A
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MONOPOLISTIC COMPETITION The Makings of Monopolistic Competition A monopolistically competitive market has three key characteristics: 1. Firms compete by selling differentiated products that are highly substitutable for one another but not perfect substitutes. 2. There is free entry and exit : it is relatively easy for new firms to enter the market with their own brands and for existing firms to leave if their products become unprofitable. 3. There are many sellers and buyers. e.g., restaurants Econ 100A Mortimer
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MONOPOLISTIC COMPETITION Equilibrium in the Short Run and the Long Run In the long run , these profits attract new firms with competing brands. The firm’s market share falls, and its demand curve shifts downward . In long-run equilibrium, described in part (b), price equals average cost, so the firm earns zero profit even though it has market power. Econ 100A Mortimer Price exceeds marginal cost and the firm has market power. In the short run , described in part (a), price also exceeds average cost, and the firm earns profits shown by the yellow- shaded rectangle.
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MONOPOLISTIC COMPETITION Monopolistic Competition and Economic Efficiency Under monopolistic competition, P > MC. There is a deadweight loss, as shown by the yellow-shaded area. The demand curve is downward-sloping, so the zero-profit point is to the left of the point of minimum average cost. Consumers benefit from product diversity Comparison of Monopolistically Competitive Equilibrium and Perfectly Competitive Equilibrium In both types of markets, entry occurs until profits are driven to zero. Econ 100A Mortimer Under perfect competition, P=MC. The demand curve facing the firm is horizontal, so the zero-profit point occurs at the point of minimum average cost.
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MONOPOLISTIC COMPETITION The Number of Firms and Price Elasticity • A typical firm in Market A with relatively elastic demand has a low margin and a large volume. • A typical firm in market B with relatively inelastic demand has a high margin and a small volume.
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Ec100A Ch12 - 12 &13 MONOPOLISTIC COMPETITION,...

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