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Unformatted text preview: 9160335_CH12_p269-286.qxd 6/22/09 9:04 AM Page 269 12 Monopolistic Competition After studying this chapter,
y ou will be able to:
■ Define and identify monopolistic competition ■ Explain how a firm in monopolistic competition determines
its price and output in the short run and the long run ■ Explain why advertising costs are high and why firms use
brand names in a monopolistically competitive industry Fifty years ago, Wichita, like most places in America,
had no pizza restaurants. When Dan Carney opened his first
Pizza Hut in a former beer shop, he was a local monopolist.
Dan’s business grew to become one of the world’s largest pizza compete, but each has a monopoly on its own special kind producers. But the pizza market is highly competitive. Today in of pizza. Wichita, 185 pizza parlors compete for business. Pizza Hut is Most of the things that you buy are like pizza—they still there, but so are Old Chicago, Papa John’s, Dmarios, Papa come in many different types. Running shoes and cell Murphys Take n Bake, Godfathers, Dominos, Cici’s, Perfect phones are two more striking examples. Pizza, Villa Pizza, Knollas Pizza, Z Pizza, Bellinis Pizzeria, Il
Vicino Wood Oven Pizza, Back Alley, and many others.
As you well know, a pizza is not just a pizza. People care
about where they buy their pizza. They care about the crust,
the sauce, the toppings, the style, and whether it’s cooked in
a wood-fired oven. The varieties are almost endless.
Because there are many different types of pizza, the
market for pizza isn’t perfectly competitive. Pizza producers The model of monopolistic competition that is explained in
this chapter helps us to understand the competition that we
see every day in the markets for pizza, shoes, cell phones,
and for most other consumer goods and services. Reading Between the Lines, at the end of this chapter,
applies the model of monopolistic competition to the market
for 3G cell phones and the flurry of activity in that market
following the launch of the new iPhone in 2008. 269 9160335_CH12_p269-286.qxd 270 6/22/09 9:04 AM Page 270 CHAPTER 12 Monopolistic Competition ◆ What Is Monopolistic
You have studied perfect competition, in which a
large number of firms produce at the lowest possible cost, make zero economic profit, and are efficient. You’ve also studied monopoly, in which a
single firm restricts output, produces at a higher
cost and price than in perfect competition, and is
Most real-world markets are competitive but not
perfectly competitive, because firms in these markets
have some power to set their prices, as monopolies do.
We call this type of market monopolistic competition.
Monopolistic competition is a market structure in
■ ■ A large number of firms compete.
Each firm produces a differentiated product.
Firms compete on product quality, price, and
Firms are free to enter and exit the industry. Large Number of Firms
In monopolistic competition, as in perfect competition, the industry consists of a large number of
firms. The presence of a large number of firms has
three implications for the firms in the industry.
Small Market Share In monopolistic competition, each firm supplies a small part of the total industry
output. Consequently, each firm has only limited
power to influence the price of its product. Each
firm’s price can deviate from the average price of
other firms by only a relatively small amount.
Ignore Other Firms A firm in monopolistic competi- tion must be sensitive to the average market price of
the product, but the firm does not pay attention to
any one individual competitor. Because all the firms
are relatively small, no one firm can dictate market
conditions, and so no one firm’s actions directly affect
the actions of the other firms.
Collusion Impossible Firms in monopolistic compe- tition would like to be able to conspire to fix a
higher price—called collusion. But because the
number of firms in monopolistic competition is
large, coordination is difficult and collusion is not
possible. Product Differentiation
A firm practices product differentiation if it makes a product that is slightly different from the products of competing firms. A differentiated product is one that is a
close substitute but not a perfect substitute for the
products of the other firms. Some people are willing to
pay more for one variety of the product, so when its
price rises, the quantity demanded of that variety
decreases, but it does not (necessarily) decrease to zero.
For example, Adidas, Asics, Diadora, Etonic, Fila, New
Balance, Nike, Puma, and Reebok all make differentiated running shoes. If the price of Adidas running
shoes rises and the prices of the other shoes remain
constant, Adidas sells fewer shoes and the other producers sell more. But Adidas shoes don’t disappear
unless the price rises by a large enough amount. Competing on Quality, Price,
Product differentiation enables a firm to compete
with other firms in three areas: product quality,
price, and marketing.
Quality The quality of a product is the physical attributes that make it different from the products of
other firms. Quality includes design, reliability, the
service provided to the buyer, and the buyer’s ease of
access to the product. Quality lies on a spectrum that
runs from high to low. Some firms—such as Dell
Computer Corp.—offer high-quality products. They
are well designed and reliable, and the customer
receives quick and efficient service. Other firms offer
a lower-quality product that is less well designed, that
might not work perfectly, and that the buyer must
travel some distance to obtain.
Price Because of product differentiation, a firm in monopolistic competition faces a downward-sloping
demand curve. So, like a monopoly, the firm can set
both its price and its output. But there is a tradeoff
between the product’s quality and price. A firm that
makes a high-quality product can charge a higher price
than a firm that makes a low-quality product.
Marketing Because of product differentiation, a firm in monopolistic competition must market its product. Marketing takes two main forms: advertising
and packaging. A firm that produces a high-quality 9160335_CH12_p269-286.qxd 6/22/09 9:04 AM Page 271 What Is Monopolistic Competition? product wants to sell it for a suitably high price. To
be able to do so, it must advertise and package its
product in a way that convinces buyers that they are
getting the higher quality for which they are paying
a higher price. For example, pharmaceutical companies advertise and package their brand-name drugs
to persuade buyers that these items are superior to
the lower-priced generic alternatives. Similarly, a lowquality producer uses advertising and packaging to
persuade buyers that although the quality is low, the
low price more than compensates for this fact. Entry and Exit
Monopolistic competition has no barriers to prevent
new firms from entering the industry in the long
run. Consequently, a firm in monopolistic competition cannot make an economic profit in the long
run. When existing firms make an economic profit,
new firms enter the industry. This entry lowers
prices and eventually eliminates economic profit.
When firms incur economic losses, some firms leave
the industry in the long run. This exit increases
prices and eventually eliminates the economic loss.
In long-run equilibrium, firms neither enter nor
leave the industry and the firms in the industry make
zero economic profit. 271 Examples of Monopolistic Competition
The box below shows 10 industries that are good
examples of monopolistic competition. These
industries have a large number of firms (shown in
parentheses after the name of the industry). In the
most concentrated of these industries, audio and
video equipment, the largest 4 firms produce only
30 percent of the industry’s total sales and the
largest 20 firms produce 75 percent of total sales.
The number on the right is the HerfindahlHirschman Index. Producers of clothing, jewelry,
computers, and sporting goods operate in monopolistic competition. Review Quiz ◆
3 What are the distinguishing characteristics of
How do firms in monopolistic competition
Provide some examples of industries near your
school that operate in monopolistic competition
(excluding those in the figure below).
Work Study Plan 12.1
and get instant feedback. Monopolistic Competition Today
Almost Everything You Buy
These ten industries operate in
monopolistic competition. The
number of firms in the industry is
shown in parentheses after the
name of the industry. The red bars
show the percentage of industry
sales by the largest 4 firms. The
green bars show the percentage of
industry sales by the next 4 largest
firms, and the blue bars show the
percentage of industry sales by the
next 12 largest firms. So the entire
length of the combined red, green,
and blue bars shows the percentage
of industry sales by the largest 20
firms. The Herfindahl-Hirschman
Index is shown on the right.
Source of data: U.S. Census Bureau. Industry (number of firms) Herfindahl-Hirschman Index Audio and video equipment (521) 415 Computers (1870) 465 Frozen foods (531) 350 Canned foods (661) 259 Book printing (690) 364 Men's and boy's clothing (1362) 462 Sporting goods (2477) 161 Fish and seafood (731) 105 Jewelry (2278) 81 Women's and girl's clothing (2927) 76 0 10 20 30 40 50 60 70 80 Percentage of industry total revenue
4 largest firms
Measures of Concentration next 4 largest firms next 12 largest firms 9160335_CH12_p269-286.qxd 272 6/22/09 9:04 AM Page 272 CHAPTER 12 Monopolistic Competition ◆ Price and Output in FIGURE 12.1 Suppose you’ve been hired by VF Corporation, the
firm that owns Nautica Clothing Corporation, to
manage the production and marketing of Nautica
jackets. Think about the decisions that you must make
at Nautica. First, you must decide on the design and
quality of jackets and on your marketing program.
Second, you must decide on the quantity of jackets to
produce and the price at which to sell them.
We’ll suppose that Nautica has already made its
decisions about design, quality, and marketing and
now we’ll concentrate on the output and pricing
decision. We’ll study quality and marketing decisions
in the next section.
For a given quality of jackets and marketing activity,
Nautica faces given costs and market conditions. Given
its costs and the demand for its jackets, how does
Nautica decide the quantity of jackets to produce and
the price at which to sell them? The Firm’s Short-Run Output and Price
In the short run, a firm in monopolistic competition makes its output and price decision just like a
monopoly firm does. Figure 12.1 illustrates this
decision for Nautica jackets.
The demand curve for Nautica jackets is D. This
demand curve tells us the quantity of Nautica jackets demanded at each price, given the prices of other
jackets. It is not the demand curve for jackets in
The MR curve shows the marginal revenue curve
associated with the demand curve for Nautica jackets.
It is derived just like the marginal revenue curve of a
single-price monopoly that you studied in Chapter 11.
The ATC curve and the MC curve show the average total cost and the marginal cost of producing
Nautica’s goal is to maximize its economic profit.
To do so, it produces the output at which marginal
revenue equals marginal cost. In Fig. 12.1, this output is 125 jackets a day. Nautica charges the price
that buyers are willing to pay for this quantity, which
is determined by the demand curve. This price is $75
per jacket. When Nautica produces 125 jackets a day,
its average total cost is $25 per jacket and it makes an
economic profit of $6,250 a day ($50 per jacket Price and cost (dollars per Nautica jacket) Monopolistic Competition Economic Profit in the
Short Run 150 125 MC Price greater
profit 100 Marginal revenue
= marginal cost ATC 75 D 50 MR Profitmaximizing
quantity 25 0 50 100 125 150
Quantity (Nautica jackets per day) Nautica maximizes profit by producing the quantity at
which marginal revenue equals marginal cost,125 jackets a
day, and charging the price of $75 a jacket. This price
exceeds the average total cost of $25 a jacket, so the firm
makes an economic profit of $50 a jacket. The blue rectangle illustrates economic profit, which equals $6,250 a day
($50 a jacket multiplied by 125 jackets a day).
animation multiplied by 125 jackets a day). The blue rectangle
shows Nautica’s economic profit. Profit Maximizing Might Be Loss Minimizing
Figure 12.1 shows that Nautica is earning a large economic profit. But such an outcome is not inevitable. A
firm might face a level of demand for its product that is
too low for it to make an economic profit.
[email protected] was such a firm. Offering highspeed Internet service over the same cable that provides television, [email protected] hoped to capture a
large share of the Internet portal market in competition with AOL, MSN, and a host of other providers.
Figure 12.2 illustrates the situation facing
[email protected] in 2001. The demand curve for its
portal service is D, the marginal revenue curve is MR,
the average total cost curve is ATC, and the marginal
cost curve is MC. [email protected] maximized 9160335_CH12_p269-286.qxd 6/22/09 9:04 AM Page 273 Price and Output in Monopolistic Competition Price and cost (dollars per month) 100 MC
80 ATC Economic
50 Marginal revenue
= marginal cost 40 D
20 0 Price less
20 MR 40 Profit-maximizing
60 80 100 Quantity (thousands of customers connected) Profit is maximized where marginal revenue equals marginal cost. The loss-minimizing quantity is 40,000 customers. The price of $40 a month is less than the average
total cost of $50 a month, so the firm incurs an economic
loss of $10 a customer. The red rectangle illustrates economic loss, which equals $400,000 a month ($10 a customer multiplied by 40,000 customers).
animation profit—equivalently, it minimized its loss—by producing the output at which marginal revenue equals
marginal cost. In Fig. 12.2, this output is 40,000 customers. [email protected] charged the price that buyers
were willing to pay for this quantity, which was determined by the demand curve and which was $40 a
month. With 40,000 customers, [email protected]
average total cost was $50 per customer, so it
incurred an economic loss of $400,000 a month ($10
a customer multiplied by 40,000 customers). The red
rectangle shows [email protected] economic loss.
So far, the firm in monopolistic competition looks
like a single-price monopoly. It produces the quantity at
which marginal revenue equals marginal cost and then
charges the price that buyers are willing to pay for that
quantity, as determined by the demand curve. The key
difference between monopoly and monopolistic competition lies in what happens next when firms either make
an economic profit or incur an economic loss. Long Run: Zero Economic Profit
A firm like [email protected] is not going to incur an
economic loss for long. Eventually, it goes out of
business. Also, there is no restriction on entry into
monopolistic competition, so if firms in an industry
are making economic profit, other firms have an
incentive to enter that industry.
As the Gap and other firms start to make jackets
similar to those made by Nautica, the demand for
Nautica jackets decreases. The demand curve for
Nautica jackets and the marginal revenue curve shift
leftward. As these curves shift leftward, the profitmaximizing quantity and price fall.
Figure 12.3 shows the long-run equilibrium. The
demand curve for Nautica jackets and the marginal
revenue curve have shifted leftward. The firm produces 75 jackets a day and sells them for $25 each.
At this output level, average total cost is also $25
Price and cost (dollars per Nautica jacket) Economic Loss in the
Short Run FIGURE 12.2 273 Output and Price in the
Long Run 50 MC
40 Zero economic
profit ATC 30
20 10 Price =
total cost MR
0 50 75 Profitmaximizing
quantity 100 D 150 Quantity (Nautica jackets per day) Economic profit encourages entry, which decreases the
demand for each firm’s product. When the demand curve
touches the ATC curve at the quantity at which MR equals
MC, the market is in long-run equilibrium. The output that
maximizes profit is 75 jackets a day, and the price is $25
per jacket. Average total cost is also $25 per jacket, so
economic profit is zero.
animation 9160335_CH12_p269-286.qxd 6/22/09 9:04 AM Page 274 CHAPTER 12 Monopolistic Competition 274 Excess Capacity A firm has excess capacity if it pro- So Nautica is making zero economic profit on its
jackets. When all the firms in the industry are making zero economic profit, there is no incentive for
new firms to enter.
If demand is so low relative to costs that firms
incur economic losses, exit will occur. As firms leave
an industry, the demand for the products of the
remaining firms increases and their demand curves
shift rightward. The exit process ends when all the
firms in the industry are making zero economic profit. duces below its efficient scale, which is the quantity at
which average total cost is a minimum—the quantity
at the bottom of the U-shaped ATC curve. In Fig. 12.4,
the efficient scale is 100 jackets a day. Nautica (part
a) produces 75 Nautica jackets a day and has excess
capacity of 25 jackets a day. But if all jackets are alike
and are produced by firms in perfect competition
(part b) each firm produces 100 jackets a day, which
is the efficient scale. Average total cost is the lowest
possible only in perfect competition.
You can see the excess capacity in monopolistic
competition all around you. Family restaurants
(except for the truly outstanding ones) almost always
have some empty tables. You can always get a pizza
delivered in less than 30 minutes. It is rare that every
pump at a gas station is in use with customers waiting in line. There are always many real estate agents
ready to help find or sell a home. These industries are
examples of monopolistic competition. The firms Monopolistic Competition and Perfect
Figure 12.4 compares monopolistic competition
and perfect competition and highlights two key differences between them: FIGURE 12.4 Excess Capacity and Markup
MC 50 40 30 ATC
20 Price and cost (dollars per jacket) ■ Excess capacity
Markup Price and cost (dollars per Nautica jacket) ■ MC 50 40 30 ATC Price =
Marginal cost 23
20 Markup D = MR D
cost 0 25 Excess
50 MR 75
Quantity (Nautica jackets per day) (a) Monopolistic competition The efficient scale is 100 jackets a day. In monopolistic competition in the long run, because the firm faces a downwardsloping demand curve for its product, the quantity produced is
less than the efficient scale and the firm has excess capacity.
Price exceeds marginal cost by the amount of the markup.
animation Quantity =
Efficient scale Efficient
0 25 50 75 100
Quantity (jackets per day) (b) Perfect competition In contrast, because in perfect competition the demand for
each firm’s product is perfectly elastic, the quantity produced equals the efficient scale and price equals marginal
cost. The firm produces at the least possible cost and there
is no markup. 9160335_CH12_p269-286.qxd 6/22/09 9:04 AM Page 275 Price and Output in Monopolistic Competition have excess capacity. They could sell more by cutting
their prices, but they would then incur losses.
Markup A firm’s markup is the amount by which
price exceeds marginal cost. Figure 12.4(a) shows
Nautica’s markup. In perfect competition, price
always equals marginal cost and there is no markup.
Figure 12.4(b) shows this case. In monopolistic competition, buyers pay a higher price than in perfect
competition and also pay more than marginal cost. Is Monopolistic Competition Efficient?
Resources are used efficiently when marginal social
benefit equals marginal social cost. Price equals marginal social benefit and the firm’s marginal cost equals
marginal social cost (assuming there are no external
benefits or costs). So if the price of a Nautica jacket
exceeds the marginal cost of producing it, the quantity of Nautica jackets produced is less than the efficient quantity. And you’ve just seen that in long-run
equilibrium in monopolistic competition, price does
exceed marginal cost. So is the quantity produced in
monopolistic competition less than the efficient
quantity? 275 others. Contrast a scene from the China of the
1960s, when everyone wore a Mao tunic, with the
China of today, where everyone wears the clothes of
their own choosing. Or contrast a scene from the
Germany of the 1930s, when almost everyone who
could afford a car owned a first-generation
Volkswagen Beetle, with the world of today with its
enormous variety of styles and types of automobiles.
If people value variety, why don’t we see infinite
variety? The answer is that variety is costly. Each different variety of any product must be designed, and
then customers must be informed about it. These initial costs of design and marketing—called setup
costs—mean that some varieties that are too close to
others already available are just not worth creating.
The Bottom Line Product variety is both valued and
costly. The efficient degree of product variety is the
one for which the marginal social benefit of product
variety equals its marginal social cost. The loss that
arises because the quantity produced is less than the
efficient quantity is offset by the gain that arises from
having a greater degree of product variety. So compared to the alternative—product uniformity—
monopolistic competition might be efficient. Making the Relevant Comparison Two economists meet in the street, and one asks the other, “How is
your husband?” The quick reply is “Compared to
what?” This bit of economic wit illustrates a key
point: Before we can conclude that something needs
fixing, we must check out the available alternatives.
The markup that drives a gap between price and
marginal cost in monopolistic competition arises
from product differentiation. It is because Nautica
jackets are not quite the same as jackets from Banana
Republic, CK, Diesel, DKNY, Earl Jackets, Gap,
Levi, Ralph Lauren, or any of the other dozens of
producers of jackets that the demand for Nautica
jackets is not perfectly elastic. The only way in which
the demand for jackets from Nautica might be perfectly elastic is if there is only one kind of jacket and
all firms make it. In this situation, Nautica jackets are
indistinguishable from all other jackets. They don’t
even have identifying labels.
If there was only one kind of jacket, the total benefit of jackets would almost certainly be less than it is
with variety. People value variety—not only because
it enables each person to select what he or she likes
best but also because it provides an external benefit.
Most of us enjoy seeing variety in the choices of Review Quiz ◆
5 How does a firm in monopolistic competition
decide how much to produce and at what price
to offer its product for sale?
Why can a firm in monopolistic competition
make an economic profit only in the short run?
Why do firms in monopolistic competition
operate with excess capacity?
Why is there a price markup over marginal cost
in monopolistic competition?
Is monopolistic competition efficient?
Work Study Plan 12.2
and get instant feedback. You’ve seen how the firm in monopolistic competition determines its output and price in both the
short run and the long run when it produces a given
product and undertakes a given marketing effort. But
how does the firm choose its product quality and
marketing effort? We’ll now study these decisions. 9160335_CH12_p269-286.qxd 276 6/22/09 9:04 AM Page 276 CHAPTER 12 Monopolistic Competition ◆ Product Development
When Nautica made its price and output decision
that we’ve just studied, it had already made its product quality and marketing decisions. We’re now
going to look at these decisions and see how they
influence the firm’s output, price, and economic
profit. Innovation and Product Development
The prospect of new firms entering the industry keeps
firms in monopolistic competition on their toes! To
enjoy economic profits, they must continually seek
ways of keeping one step ahead of imitators—other
firms who imitate the success of profitable firms.
One major way of trying to maintain economic
profit is for a firm to seek out new products that
will provide it with a competitive edge, even if only
temporarily. A firm that introduces a new and differentiated product faces a demand that is less elastic and is able to increase its price and make an
economic profit. Eventually, imitators will make
close substitutes for the innovative product and
compete away the economic profit arising from an
initial advantage. So to restore economic profit, the
firm must again innovate.
Profit-Maximizing Product Innovation The decision
to innovate and develop a new or improved product
is based on the same type of profit-maximizing calculation that you’ve already studied.
Innovation and product development are costly
activities, but they also bring in additional revenues.
The firm must balance the cost and revenue at the
The marginal dollar spent on developing a new
or improved product is the marginal cost of product
development. The marginal dollar that the new or
improved product earns for the firm is the marginal
revenue of product development. At a low level of
product development, the marginal revenue from a
better product exceeds the marginal cost. At a high
level of product development, the marginal cost of a
better product exceeds the marginal revenue.
When the marginal cost and marginal revenue of
product development are equal, the firm is undertaking the profit-maximizing amount of product
development. Efficiency and Product Innovation Is the profit-maxi- mizing amount of product innovation also the efficient amount? Efficiency is achieved if the marginal
social benefit of a new and improved product equals
its marginal social cost.
The marginal social benefit of an innovation is the
increase in price that consumers are willing to pay for
it. The marginal social cost is the amount that the
firm must pay to make the innovation. Profit is maximized when marginal revenue equals marginal cost.
But in monopolistic competition, marginal revenue is
less than price, so product innovation is probably not
pushed to its efficient level.
Monopolistic competition brings many product
innovations that cost little to implement and are
purely cosmetic, such as new and improved packaging or a new scent in laundry powder. And even
when there is a genuine improved product, it is never
as good as what the consumer is willing to pay for.
For example, “The Legend of Zelda: Twilight
Princess” is regarded as an almost perfect and very
cool game, but users complain that it isn’t quite perfect. It is a game whose features generate a marginal
revenue equal to the marginal cost of creating them. Advertising
A firm with a differentiated product needs to ensure
that its customers know how its product is different
from the competition. A firm also might attempt to
create a consumer perception that its product is different from its competitors, even when that difference is small. Firms use advertising and packaging
to achieve this goal.
Advertising Expenditures Firms in monopolistic
competition incur huge costs to ensure that buyers
appreciate and value the differences between their
own products and those of their competitors. So a
large proportion of the price that we pay for a good
covers the cost of selling it, and this proportion is
increasing. Advertising in newspapers and magazines
and on radio, television, and the Internet is the main
selling cost. But it is not the only one. Selling costs
include the cost of shopping malls that look like
movie sets, glossy catalogs and brochures, and the
salaries, airfares, and hotel bills of salespeople.
Advertising expenditures affect the profits of firms
in two ways: They increase costs, and they change
demand. Let’s look at these effects. 9160335_CH12_p269-286.qxd 6/22/09 9:04 AM Page 277 Product Development and Marketing The Cost of Selling a Pair of Shoes
When you buy a pair of running shoes that cost you
$70, you’re paying $9 for the materials from which
the shoes are made, $2.75 for the services of the
Malaysian worker who made the shoes, and $5.25
for the production and transportation services of a
manufacturing firm in Asia and a shipping company. These numbers total $17. You pay $3 to the
U.S. government in import duty. So we’ve now
accounted for a total of $20. Where did the other
$50 go? It is the cost of advertising, retailing, and
other sales and distribution services.
The selling costs associated with running shoes
are not unusual. Almost everything that you buy
includes a selling cost component that exceeds one
half of the total cost. Your clothing, food, electronic
items, DVDs, magazines, and even your textbooks
cost more to sell than they cost to manufacture.
Advertising costs are only a part and often a small
part of total selling costs. For example, Nike spends
about $4 on advertising per pair of running shoes
For the U.S. economy as a whole, there are some
20,000 advertising agencies, which employ more than
200,000 people and have sales of $45 billion. These
numbers are only part of the total cost of advertising
because firms have their own internal advertising
departments, the costs of which we can only guess.
But the biggest part of selling costs is not the cost
of advertising. It is the cost of retailing services. The
retailer’s selling costs (and economic profit) are often
as much as 50 percent of the price you pay. Selling Costs and Total Cost Selling costs are fixed costs and they increase the firm’s total cost. So like
fixed costs of producing the good, advertising costs
per unit decrease as the quantity produced increases.
Figure 12.5 shows how selling costs change a firm’s
average total cost. The blue curve shows the average
total cost of production. The red curve shows the firm’s
average total cost of production plus advertising. The
height of the red area between the two curves shows the
average fixed cost of advertising. The total cost of advertising is fixed. But the average cost of advertising
decreases as output increases.
Figure 12.5 shows that if advertising increases the
quantity sold by a large enough amount, it can lower
average total cost. For example, if the quantity sold
increases from 25 jackets a day with no advertising to
100 jackets a day with advertising, average total cost
falls from $60 to $40 a jacket. The reason is that
although the total fixed cost has increased, the greater
fixed cost is spread over a greater output, so average
total cost decreases.
Cost (dollars per Nautica jacket) Selling Costs in the United States 277 Selling Costs and Total Cost 100 80 By increasing the
total cost 60 Average total cost
with advertising Advertising
cost 40 Average total cost
with no advertising 20 0 25 50 100 150 200 250 Quantity (Nautica jackets per day) Raw
$50 Selling costs such as the cost of advertising are fixed costs.
When added to the average total cost of production, selling
costs increase average total cost by a greater amount at
small outputs than at large outputs. If advertising enables
sales to increase from 25 jackets a day to 100 jackets a
day, average total cost falls from $60 to $40 a jacket.
animation 9160335_CH12_p269-286.qxd 6/22/09 9:04 AM Page 278 CHAPTER 12 Monopolistic Competition 278 Selling Costs and Demand Advertising and other maximized at 75 jackets per day, and the markup is
large. In part (b), advertising, which is a fixed cost,
increases average total cost from ATC0 to ATC1 but
leaves marginal cost unchanged at MC. Demand
becomes much more elastic, the profit-maximizing
quantity increases, and the markup shrinks. selling efforts change the demand for a firm’s product. But how? Does demand increase or does it
decrease? The most natural answer is that advertising
increases demand. By informing people about the
quality of its products or by persuading people to
switch from the products of other firms, a firm might
expect to increase the demand for its own products.
But all firms in monopolistic competition advertise, and all seek to persuade customers that they
have the best deal. If advertising enables a firm to
survive, the number of firms in the market might
increase. And to the extent that the number of firms
does increase, advertising decreases the demand faced
by any one firm. It also makes the demand for any
one firm’s product more elastic. So advertising can
end up not only lowering average total cost but also
lowering the markup and the price.
Figure 12.6 illustrates this possible effect of advertising. In part (a), with no advertising, the demand
for Nautica jackets is not very elastic. Profit is
Advertising and the Markup With no advertising,
demand is low but ... 100 MC
is large 60
55 Some advertising, like the Maria Sharapova Canon
camera ads on television and in glossy magazines or
the huge number of dollars that Coke and Pepsi
spend, seems hard to understand. There doesn’t
seem to be any concrete information about a camera
in the glistening smile of a tennis player. And surely
everyone knows about Coke and Pepsi. What is the
gain from pouring millions of dollars a month into
advertising these well-known colas?
One answer is that advertising is a signal to the consumer of a high-quality product. A signal is an action
taken by an informed person (or firm) to send a ATC 40 20 Price and cost (dollars per Nautica jacket) Price and cost (dollars per Nautica jacket) FIGURE 12.6 Using Advertising to Signal Quality Advertising increases cost but
makes demand more elastic, ... 100 MC
80 ATC1 60 ATC0
20 D … price falls
shrinks MR MR
0 50 75 100
Quantity (Nautica jackets per day) (a) No firms advertise If no firms advertise, demand for each firm’s product is low
and not very elastic. The profit-maximizing output is small, the
markup is large, and the price is high. animation 0 50 100 125 150
Quantity (Nautica jackets per day) (b) All firms advertise Advertising increases average total cost and shifts the ATC
curve upward from ATC0 to ATC1. If all firms advertise, the
demand for each firm’s product becomes more elastic. Output
increases, the price falls, and the markup shrinks. 9160335_CH12_p269-286.qxd 6/22/09 9:04 AM Page 279 Product Development and Marketing message to uninformed people. Think about two colas:
Coke and Oke. Oke knows that its cola is not very
good and that its taste varies a lot depending on which
cheap batch of unsold cola it happens to buy each
week. So Oke knows that while it could get a lot of
people to try Oke by advertising, they would all quickly
discover what a poor product it is and switch back to
the cola they bought before. Coke, in contrast, knows
that its product has a high-quality consistent taste and
that once consumers have tried it, there is a good
chance they’ll never drink anything else. On the basis
of this reasoning, Oke doesn’t advertise but Coke does.
And Coke spends a lot of money to make a big splash.
Cola drinkers who see Coke’s splashy ads know that
the firm would not spend so much money advertising
if its product were not truly good. So consumers reason that Coke is indeed a really good product. The
flashy expensive ad has signaled that Coke is really
good without saying anything about Coke.
Notice that if advertising is a signal, it doesn’t need
any specific product information. It just needs to be
expensive and hard to miss. That’s what a lot of advertising looks like. So the signaling theory of advertising
predicts much of the advertising that we see. Brand Names
Many firms create and spend a lot of money promoting a brand name. Why? What benefit does a
brand name bring to justify the sometimes high cost
of establishing it?
The basic answer is that a brand name provides
information to consumers about the quality of a
product, and is an incentive to the producer to
achieve a high and consistent quality standard.
To see how a brand name helps the consumer,
think about how you use brand names to get information about quality. You’re on a road trip, and it is
time to find a place to spend the night. You see roadside advertisements for Holiday Inn, Joe’s Motel, and
Annie’s Driver’s Stop. You know about Holiday Inn
because you’ve stayed in it before. You’ve also seen
their advertisements and know what to expect from
them. You have no information at all about Joe’s and
Annie’s. They might be better than the lodgings you
do know about, but without that knowledge, you’re
not going to try them. You use the brand name as
information and stay at Holiday Inn.
This same story explains why a brand name provides an incentive to achieve high and consistent quality. Because no one would know whether Joe’s and 279 Annie’s were offering a high standard of service, they
have no incentive to do so. But equally, because everyone expects a given standard of service from Holiday
Inn, a failure to meet a customer’s expectation would
almost surely lose that customer to a competitor. So
Holiday Inn has a strong incentive to deliver what it
promises in the advertising that creates its brand name. Efficiency of Advertising and Brand Names
To the extent that advertising and brand names provide consumers with information about the precise
nature of product differences and about product
quality, they benefit the consumer and enable a better product choice to be made. But the opportunity
cost of the additional information must be weighed
against the gain to the consumer.
The final verdict on the efficiency of monopolistic
competition is ambiguous. In some cases, the gains
from extra product variety unquestionably offset the
selling costs and the extra cost arising from excess
capacity. The tremendous varieties of books and magazines, clothing, food, and drinks are examples of
such gains. It is less easy to see the gains from being
able to buy a brand-name drug that has a chemical
composition identical to that of a generic alternative,
but many people do willingly pay more for the
brand-name alternative. Review Quiz ◆
5 How, other than by adjusting price, do firms in
monopolistic competition compete?
Why might product innovation and development
be efficient and why might it be inefficient?
How do selling costs influence a firm’s cost
curves and its average total cost?
How does advertising influence demand?
Are advertising and brand names efficient?
Work Study Plan 12.3
and get instant feedback. ◆ Monopolistic competition is one of the most common market structures that you encounter
in your daily life. Reading Between the Lines on
pp. 280–281 applies the model of monopolistic competition to the market for 3G cell phones and shows
you why you can expect continual innovation and
the introduction of new phones from Apple and
other producers. 9160335_CH12_p269-286.qxd 6/22/09 9:04 AM Page 280 READING BETWEEN THE LINES Product Differentiation in the 3G Cell Phone Market
Watch Your Back Apple, These 10 iPhone Killers
Are On the Prowl
July 17, 2008 It’s been a week since the Apple iPhone 3G launched in earnest, to throngs of Mac-faithful Appleheads looking to get their hands on the second-generation of the device. It took
just a weekend for Apple to sell one million 3G iPhones, so says Apple.
But as the lines at the Apple Store vanish, the dust starts to clear and iPhone-mania
wanes, smart phone makers are lining up to try and take a bite out of Apple iPhone’s success. Some take elements from the iPhone and put a new spin on them though they’re not
necessarily iPhone clones.
Others take mobile computing in a different direction. Regardless, there is a crop of device makers lurking around the corner, peeler in hand, hoping to skin the iPhone, or at least
give Apple a flesh wound.
Here we take a look at 10 iPhone killers, devices that have the potential to cut the core right
out of Apple. Anyone else smell apple pie?
[The ten iPhone killers are the BlackBerry Bold 9000, Palm Treo 800w, Palm Centro, Samsung
Instinct, Samsung Omnia, Nokia E90 Communicator, Nokia E71, Nokia E66, HTC Touch
Diamond, and OpenMoko Neo FreeRunner.]
Copyright 2008 Channel Web, crn.com. Further reproduction prohibited. Essence of the Story
■ On July 11, 2008, Apple launched its new 3G iPhone. ■ World-wide interest in the new phone was high and
Apple sold 1 million 3G iPhones in the first week. ■ Anticipating Apple’s success, other phone makers entered the market with 3G phones. 280 ■ Some of the new phones have features similar to those
of the iPhone, but each phone is slightly different from
the iPhone and from the other phones. 6/22/09 9:04 AM Page 281 Economic Analysis
■ On July 11, 2008, Apple launched its new 3G iPhone. ■ By creating a substantially differentiated product,
Apple was able to generate a great deal of interest in
the new phone throughout the world. ■ In the first weekend, Apple sold one million of the new
phones. ■ Price (dollars per iPhone) 9160335_CH12_p269-286.qxd But within a month of the launch of the 3G iPhone,
many competing but differentiated devices were on the
market. ■ ■ The marginal cost curve is MC and the average total
cost curve is ATC. Apple maximizes its economic profit
by producing the quantity at which marginal revenue
equals marginal cost, which in this example is 3 million
iPhones a month. MC 250 ATC 100
MR 0 3
Quantity (millions of iPhones per month) Figure 1 Economic profit in the short run
Price (dollars per iPhone) Because the Apple phone is different from its competitors and has features that users value, the demand
curve, D, and marginal revenue curve, MR, provide a
large short-run profit opportunity. 300 Apple's short-run
on the 3G iPhone 150 Figure 1 shows the market for Apple’s 3G iPhone in its
first month. (The numbers are assumptions.) ■ 350 200 The monopolistic competition model explains what is
happening in the 3G cell phone market. ■ 400 400
profit ATC 200 ■ This quantity of phones can be sold for $200 each. ■ The blue rectangle shows Apple’s economic profit. 150 ■ Because this market is profitable, entry takes place. 100 ■ Within a month of the launch of the 3G iPhone, many
competitors had entered the market. Efficient
scale ■ Figure 2 shows the the consequences of entry. ■ The demand for the iPhone decreased as the market
was shared with the other phones. ■ Excess capacity
0 MR D 3
Quantity (millions of iPhones per month) Figure 2 Zero economic profit in the long run Apple’s profit-maximizing price decreased, and in the
long run, economic profit is eliminated. ■ 50 With zero economic profit, Apple now has an incentive to develop an even better differentiated phone and
start the cycle described here again, making an economic profit in a new phone in the short run. 281 9160335_CH12_p269-286.qxd 282 6/22/09 9:04 AM Page 282 CHAPTER 12 Monopolistic Competition SUMMARY ◆ Key Points Product Development and Marketing (pp. 276–279)
■ What Is Monopolistic Competition? (pp. 270–271)
■ Monopolistic competition occurs when a large
number of firms compete with each other on
product quality, price, and marketing. Price and Output in Monopolistic Competition ■ ■ (pp. 272–275)
■ ■ Each firm in monopolistic competition faces a
downward-sloping demand curve and produces
the profit-maximizing quantity.
Entry and exit result in zero economic profit and
excess capacity in long-run equilibrium. ■ Firms in monopolistic competition innovate and
develop new products.
Advertising expenditures increase total cost, but
average total cost might fall if the quantity sold
increases by enough.
Advertising expenditures might increase demand,
but demand might decrease if competition
Whether monopolistic competition is inefficient
depends on the value we place on product variety. Key Figures
Figure 12.3 Economic Profit in the Short Run, 272
Economic Loss in the Short Run, 273
Output and Price in the Long Run, 273 Figure 12.4
Figure 12.6 Excess Capacity and Markup, 274
Selling Costs and Total Cost, 277
Advertising and the Markup, 278 Key Terms
Efficient scale, 274
Excess capacity, 274 Markup, 275
Monopolistic competition, 270 Product differentiation, 270
Signal, 278 9160335_CH12_p269-286.qxd 6/22/09 9:04 AM Page 283 Problems and Applications PROBLEMS and APPLICATIONS 283 ◆ Work problems 1–12 in Chapter 12 Study Plan and get instant feedback.
Work problems 13–22 as Homework, a Quiz, or a Test if assigned by your instructor. 1. Sara is a dot.com entrepreneur who has established a Web site at which people can design and
buy a sweatshirt. Sara pays $1,000 a week for her
Web server and Internet connection. The sweatshirts that her customers design are made to
order by another firm, and Sara pays this firm
$20 a sweatshirt. Sara has no other costs. The
table sets out the demand schedule for Sara’s
P rice Quantity demanded (dollars per sweatshirt) (sweatshirts per week) Price and cost (dollars per pair) 0
a. Calculate Sara’s profit-maximizing output,
price, and economic profit.
b. Do you expect other firms to enter the Web
sweatshirt business and compete with Sara?
c. What happens to the demand for Sara’s sweatshirts in the long run? What happens to Sara’s
economic profit in the long run?
2. The figure shows the situation facing Lite and
Kool Inc., a producer of running shoes.
MC 100 ATC 80
MR 0 50
Quantity (pairs of running shoes per week) a. What quantity does Lite and Kool produce?
b. What is the price of a pair of Lite and Kool
shoes? c. What is Lite and Kool’s economic profit or
3. In the market for running shoes, all the firms
face a similar demand curve and have similar cost
curves to those of Lite and Kool in
a. What happens to the number of firms producing running shoes in the long run?
b. What happens to the price of running shoes in
the long run?
c. What happens to the quantity of running
shoes produced by Lite and Kool in the long
d. What happens to the quantity of running
shoes in the entire market in the long run?
e. Does Lite and Kool have excess capacity in the
f. Why, if Lite and Kool has excess capacity in
the long run, doesn’t the firm decrease its
g. What is the relationship between Lite and
Kool’s price and marginal cost?
4. Is the market for running shoes described in
problem 3 efficient or inefficient? Explain your
5. Suppose that Tommy Hilfiger’s marginal cost of
a jacket is $100 (a constant marginal cost) and
at one of the firm’s shops, total fixed cost is
$2,000 a day. The profit-maximizing number
of jackets sold in this shop is 20 a day. Then
the shops nearby start to advertise their jackets.
The Tommy Hilfiger shop now spends $2,000
a day advertising its jackets, and its profit-maximizing number of jackets sold jumps to 50 a
a. What is this shop’s average total cost of a jacket sold before the advertising begins?
b. What is this shop’s average total cost of a jacket sold after the advertising begins?
c. Can you say what happens to the price of a
Tommy Hilfiger jacket? Why or why not?
d. Can you say what happens to Tommy’s
markup? Why or why not?
e. Can you say what happens to Tommy’s economic profit? Why or why not? 9160335_CH12_p269-286.qxd 284 6/22/09 9:04 AM Page 284 CHAPTER 12 Monopolistic Competition 6. How might Tommy Hilfiger in problem 5 use
advertising as a signal? How is a signal sent and
how does it work?
7. How does having a brand name help Tommy
Hilfiger in problem 5 to increase its economic
8. Wake Up and Sell the Coffee
Traffic at [Starbucks] U.S. stores dropped for the
first time in its history … [amidst] … mounting
complaints … that in its pursuit of growth, the
company has strayed too far from its roots. …
Starbucks will once again grind beans in its stores
for drip coffee. It will give free drip refills … and
provide two hours of wi-fi. …
Soon the company will roll out its new armor: a
sleek, low-rise espresso machine that makes baristas more visible. …
Of course, every change that Starbucks has made
over the past few years—automated espresso
machines, preground coffee, drive-throughs,
fewer soft chairs and less carpeting—was made
for a reason: to smooth operations or boost sales.
… Those may have been the right choices at the
time … but together they ultimately diluted the
Time, April 7, 2008
a. Explain how Starbucks’ past attempts to
maximize profits ended up eroding product
b. Explain how Starbucks’ new plan intends to
increase economic profit.
9. The Shoe That Won’t Quit
I finally decided to take the plunge this past winter and buy a pair of Uggs. … But when I got
around to shopping for my Uggs in late January,
the style that I wanted was sold out. … The
scarcity factor was not a glitch in the supply
chain, but rather a carefully calibrated strategy by
Ugg parent Deckers Outdoor that is one of the
big reasons behind the brand’s success.
Deckers tightly controls distribution to ensure
that supply does not outstrip demand. … If
Deckers ever opened up the supply of Uggs to
meet demand, sales would shoot up like a rocket,
but they’d come back down just as fast.
Fortune, June 5, 2008
a. Explain why Deckers intentionally restricts
the quantity of Uggs that the firm sells.
b. Draw a graph to illustrate how Deckers maximizes the economic profit from Uggs. 10. My Life Without TV
Should you go TV-free? YouTube is what first
made this question worth asking. … NBC
Universal and News Corp. announced last year
that they were jointly starting their own YouTube
knockoff. … Hulu … is a gorgeous piece of
interface design laid over a technically sweet
video player. … Hulu has reportedly already sold
its entire advertising inventory. … There are
plenty of other services waiting in the wings—
such as Joost and Miro. …
Time, April 28, 2008
a. Draw a graph of the cost curves and revenue
curves of YouTube if the firm is able to earn
an economic profit in the short run.
b. What do you expect to happen to YouTube’s
economic profit in the long-run, given the
information in the news clip?
c. Draw a graph to illustrate your answer to b.
11. Food’s Next Billion-Dollar Brand?
While it’s not the biggest brand in margarine,
Smart Balance has an edge on its rivals in that it’s
made with a patented blend of vegetable and
fruit oils that has been shown to raise levels of
HDL, or “good” cholesterol, which can help
improve consumers’ cholesterol levels. … Smart
Balance … sales have skyrocketed since its launch
in 1997 while sales for the margarine category
overall have stagnated. … Still, it remains to be
seen whether Smart Balance’s heart-healthy message (and higher prices) will resonate with mainstream consumers.
Fortune, June 4, 2008
a. How do you expect advertising and the Smart
Balance brand name will affect Smart Balance’s ability to earn an economic profit?
b. Are long-run economic profits a possibility for
c. Does Smart Balance have either excess capacity or a markup in long-run equilibrium?
12. Smith & Wesson Earnings Plummet 37%
Smith & Wesson Holding Corp.’s fiscal fourthquarter earnings dropped 37%, as higher marketing costs failed to boost sales, the gun maker
CNN, June 12, 2008
Explain why Smith & Wesson’s increased marketing actually decreased profits. 9160335_CH12_p269-286.qxd 6/22/09 9:04 AM Page 285 Problems and Applications 13. Lorie teaches singing. Her fixed costs are $1,000
a month, and it costs her $50 of labor to give one
class. The table shows the demand schedule for
Lorie’s singing lessons.
(dollars per lesson) Quantity demanded
(lessons per month) Price and cost (dollars per bike) 0
a. Calculate Lorie’s profit-maximizing output,
price, and economic profit.
b. Do you expect other firms to enter the singing
lesson business and compete with Lorie?
c. What happens to the demand for Lorie’s lessons in the long run? What happens to Lorie’s
economic profit in the long run?
14. The figure shows the situation facing Mike’s
Bikes Inc., a producer of mountain bikes.
400 MC ATC 350
200 D 150
Quantity (mountain bikes per week) a. What quantity does Mike’s Bikes produce and
what is its price?
b. Calculate Mike’s Bikes’ economic profit or
15. In the market for mountain bikes, the demand for
each firm’s bikes and the firm’s its cost curves are
similar to those of Mike’s Bikes in problem 14.
a. What happens to the number of firms producing mountain bikes?
b. What happens to the price of mountain bikes
in the long run?
c. What happens to the quantity of bikes produced by Mike’s Bikes in the long run? 285 d. What happens to the quantity of mountain
bikes in the entire market in the long run?
e. Is there any way for Mike’s Bikes to avoid having excess capacity in the long run?
16. Do you expect that the market for mountain
bikes described in problem 15 is efficient or inefficient? Explain your answer.
17. Bianca bakes delicious cookies. Her total fixed
cost is $40 a day, and her average variable cost is
$1 a bag. Few people know about Bianca’s
Cookies, and she is maximizing her profit by selling 10 bags a day for $5 a bag. Bianca thinks that
if she spends $50 a day on advertising, she can
increase her market share and sell 25 bags a day
for $5 a bag.
a. If Bianca’s belief about the effect of advertising
is correct, can she increase her economic profit
b. If Bianca advertises, will her average total
cost increase or decrease at the quantity
c. If Bianca advertises, will she continue to sell
her cookies for $5 a bag or will she raise her
price or lower her price?
18. Groceries for the Gourmet Palate
No food, it seems, is safe these days from being
repackaged in a shiny platinum case as an upscale
product. … Samuel Adams’ $120 Utopias, in a
ridiculous copper-covered 24-oz. (710 mL) bottle meant to resemble an old-fashioned brew kettle, … [is] barely beer. It’s not carbonated like a
Bud but aged in oak barrels like scotch, and it
has a vintage year, like a Bordeaux… light, complex and free of any alcohol sting, despite having
six times as much alcohol content as a regular
can of brew.
Time, April 14, 2008
a. Explain how Samuel Adams has differentiated
its Utopias to compete with other beer brands
in terms of quality, price, and marketing.
b. Predict whether Samuel Adams produces at,
above, or below the efficient scale in the
c. Predict whether the $120 price tag on the
Utopias is at, above, or below marginal cost:
i. In the short run.
ii. In the long run.
d. Do you think that Samuel Adams Utopias
makes the market for beer inefficient ? 9160335_CH12_p269-286.qxd 286 6/22/09 9:04 AM Page 286 CHAPTER 12 Monopolistic Competition 19. Swinging for Female Golfers
One of the hottest areas of innovation is in clubs
for women, who now make up nearly a quarter
of the 24 million golfers in the U.S. … Callaway
and Nike, two of the leading golf-equipment
manufacturers, recently released new clubs
designed specifically for women. …
Time, April 21, 2008
a. How are Callaway and Nike attempting to
maintain economic profit?
b. Draw a graph to illustrate the cost curves and
revenue curves of Callaway or Nike in the
market for golf clubs for women.
c. Show on your graph (in b) the short-run economic profit.
d. Explain why the economic profit that Callaway and Nike make on golf clubs for women
is likely to be temporary.
e. Draw a graph to illustrate the cost curves and
revenue curves of Callaway or Nike in the
market for golf clubs for women in the long
run. Mark the firm’s excess capacity.
20. A Thirst for More Champagne
Champagne exports have tripled in the past 20
years. That poses a problem for northern France,
where the bubbly hails from—not enough
grapes. So French authorities have unveiled a
plan to extend the official Champagne grapegrowing zone to cover 40 new villages. It’s the
first revision of the official appellation map since
1927, and—inevitably—it has provoked debate.
Each plot must be tested for suitability, so the
change will take several years to become effective.
In the meantime the vineyard owners whose land
values will jump markedly if the changes are
finalized certainly have reason to raise a glass.
Fortune, May 12, 2008
a. Why is France so strict about designating the
vineyards that can label their product Champagne?
b. Explain who would most likely oppose this
c. Assuming that vineyards in these 40 villages
are producing the same quality of grapes with
or without this plan, why will their land values “jump markedly” if this plan is approved?
21. Under Armour’s Big Step Up
Under Armour, the red-hot athletic-apparel
brand, has joined Nike, Adidas, and New
Balance as a major player on the market. … [Under Armour CEO] Plank prepares to move
the Under Armour brand out of its comfort zone
into the cutthroat, $18.3 billion athleticfootwear market. … Under Armour announced
it would try to revive the long-dead cross-training category. … Under Armour tested the
footwear landscape about two years ago, when it
started making American-football cleats. Selling
soccer shoes against Adidas and Nike would have
been suicidal. Football is a small, specialized
market. … “Our No. 1 goal was authenticating
ourselves as a footwear brand,” says Plank.
“Does the consumer accept putting the Under
Armour logo on a shoe?” … But will young athletes really spend $100 for a [cross training] shoe
to lift weights in? “They’re spending $40 on a T
shirt,” quips Plank, nodding to the premium
price that consumers are paying for Under
Armour’s sweat-sopping gear.
Time, May 26, 2008
a. Explain how brand names initially prevented
Under Armour from competing in the athletic
b. What factors influence Under Armour’s ability
to earn an economic profit?
c. Will Under Armour be able to make a profit
in the cross-training shoe market?
22. Study Reading Between the Lines on pp. 280–281
and then answer the following questions.
a. How did the creation of the 3G iPhone influence the demand and marginal revenue curves
faced by Apple in the market for 3G phones?
b. How do you think the creation of the 3G
iPhone influenced the demand for older generation cell phones?
c. Explain the effect on Nokia in the market for
3G cell phones of the introduction of the new
d. Draw a graph to illustrate the effect on Nokia
in the market for 3G cell phones of the introduction of the new iPhone.
e. Explain the effect on Apple of the decisions by
BlackBerry, Palm, Samsung, Nokia, HTC, and
OpenMoko to bring “iPhone killers” to market.
f. Draw a graph to illustrate the effect on Apple
of the decisions by BlackBerry, Palm, Samsung, Nokia, HTC, and OpenMoko to bring
“iPhone killers” to market.
g. Do you think the cell phone market is efficient? Explain your answer. ...
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This note was uploaded on 02/07/2010 for the course ECON 251 taught by Professor Blanchard during the Fall '08 term at Purdue University-West Lafayette.
- Fall '08