Ch 13 – Monopolistic competition

Ch 13 – Monopolistic competition - Ch 13...

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Ch. 13: Ch. 13: Monopolistic competition and  Monopolistic competition and  oligopoly oligopoly Olivier Giovannoni ECO304K: Introduction to Microeconomics
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Outline Outline 1. What is monopolistic competition? 1. (Price; Quantity) decisions in monopolistic  competition 1. Product development and marketing 1. What is oligopoly? 1. Two traditional oligopoly models 1. Monopoly games  (short intro to game theory)
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1. What is monop. competition? 1. What is monop. competition? Monopolistic competition is a situation “in between”  perfect competition and pure monopoly. Monopolistic  competition is a market structure in which: 1. A large number of firms compete 2. Firms are free to enter and exit This implies that there is no profit over the long run in monop.  competition. 1. Each firm produces a  differentiated  product Firms produce “close” substitutes but not perfect substitutes.  Differentiated products implies that  the firm’s demand curve is  downward sloping . 1. Firms compete on product quality, price and marketing. The existence of product differentiation and a large number of firms in  the industry means that firms have to rely on marketing in order to  justify their quality-price choice.  The position on the firm’s demand  curve is dictated by a quality-price trade-off. Examples of monopolistic competition are:  Technological products because they are almost never identical to  each other (phones, computers, MP3 players…) but also some  prepared food product and clothes…
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2. (p;Q) in monop. comp. As before, profits in monopolistic competition are related  to the particular characteristics of this market structure. The general rule MR=MC is still valid;  it gives us the  profit-maximizing level of output. if MR>MC, you are making a profit out of producing that item and want to  Q if MR<MC, you are making a loss out of producing that item and want to  Q Because of product differentiation, The firm’s demand in is downward sloping  (no close  substitute). The firm’s MR curve is downward sloping too , but different  than the demand curve. This is for the same reason as in  monopoly:  having differentiated products means that individual  firms enjoy  some  degree of monopoly power for the good they  are producing. The costs are the same as before:
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Ch 13 &acirc;€“ Monopolistic competition - Ch 13...

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