L19 - Economics 101:Principles of Microeconomics Professor...

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1 Economics 101:Principles of  Microeconomics Professor Jo Hertel Lecture 20: Monopolistic competition Definition a monopolistically competitive firm in the short run the long run: entry and exit, long-run equilibrium in the market More about the long run: optimal product differentiation and some examples Preview: Techniques of analyzing oligopoly
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2 Monopolistic competition Monopolistic competition is a market structure where: There are many competing producers in an industry (so they take other’s prices as given), there is free entry into and exit from the industry in the long run, and Each producer sells a differentiated product. Apparel, bookstores, fast food – differentiated by (real or perceived) differences in the actual good Coffee shops, laundromats, dry cleaners, gas stations (sometimes) – differentiated by location Most consumer goods that are not oligopolistic
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3 Product differentiation A monopolist can use product differentiation as a form of price discrimination , to sell to two different markets. In monopolistic competition, every producer just sells one differentiated product. The motivation is the same: the product is differentiated in order to sell to a slightly different market than everyone else. Unlike most oligopolies (economies of scale), monopolistic competition mostly arises endogenously .
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4 Monopolistically competitive firm in  the short run MR D ATC MC p q Loss Example #2 D MR ATC MC q p Example #1 Profit A monopolistically competitive firm acts like any other monopolist; in the short run, nothing else can happen!
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5 The long run with monopolistic competition Because every producer almost serves a different market, there is no ‘market equilibrium diagram’ in this model; instead, we look at each firm separately.
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