Ch 13 – Monopolistic competition

Ch 13 – Monopolistic competition - Ch. 13: Ch....

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Unformatted text preview: Ch. 13: Ch. 13: M onopolistic competition M onopolistic competition and oligopoly and oligopoly Olivier Giovannoni ECO304K: I ntroduction to Microeconomics Outline Outline 1. What is monopolistic competition? 1. (Pr ice; Quantity) decisions in monopolistic competition 1. Pr oduct development and mar keting 1. What is oligopoly? 1. Two tr aditional oligopoly models 1. M onopoly games (short intro to game theory) 1. What is monop. 1. What is monop. competition? competition? Monopolistic competition is a situation “in between” perfect competition and pure monopoly. Monopolistic competition is a market structure in which: 1. A lar ge number of fir ms compete 2. Fir ms ar e fr ee to enter and exit This implies that there is no profit over the long run in monop. competition. 1. Each fir m pr oduces a differ entiated pr oduct Firms produce “close” substitutes but not perfect substitutes. Differentiated products implies that the firm’s demand curve is downward sloping . 1. Fir ms compete on pr oduct quality, pr ice and mar keting. 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 ar e: Technological products because they are almost never identical to each other (phones, computers, MP3 players…) but also 2. (p;Q) in monop. comp. 2. (p;Q) in monop. comp. As before, profits in monopolistic competition are related to the particular characteristics of this market structure. The gener al r ule M R=M C 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 fir m’s demand in is downwar d sloping (no close substitute). ◦ The fir m’s M R cur ve is downwar d 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. 2. (p;Q) in monop. comp. (…) 2. (p;Q) in monop. comp. (…) (top r ight) this is a profit situation (bottom r ight)...
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This note was uploaded on 09/10/2009 for the course ECON 33815 taught by Professor Giovannoni during the Spring '08 term at University of Texas at Austin.

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Ch 13 – Monopolistic competition - Ch. 13: Ch....

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