Blanchard_ch12 - 9160335_CH12_p269-286.qxd 9:04 AM Page 269 12 Monopolistic Competition After studying this chapter y ou will be able to ■ Define

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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 Competition? 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 inefficient. 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 which ■ ■ ■ ■ A large number of firms compete. Each firm produces a differentiated product. Firms compete on product quality, price, and marketing. 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, and Marketing 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 ◆ 1 2 3 What are the distinguishing characteristics of monopolistic competition? How do firms in monopolistic competition compete? 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 Decision 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 general. 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 jackets. 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 than average total cost Economic profit 100 Marginal revenue = marginal cost ATC 75 D 50 MR Profitmaximizing quantity 25 0 50 100 125 150 200 250 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 loss 60 50 Marginal revenue = marginal cost 40 D 20 0 Price less than average total cost 20 MR 40 Profit-maximizing (loss-minimizing) quantity 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 per jacket. FIGURE 12.3 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 25 20 10 Price = Average 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 Competition 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 Price 25 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 10 10 Marginal cost 0 25 Excess capacity 50 MR 75 100 125 150 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 scale 0 25 50 75 100 125 150 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 ◆ 1 2 3 4 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 and Marketing 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 margin. 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 sold. 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. FIGURE 12.5 Cost (dollars per Nautica jacket) Selling Costs in the United States 277 Selling Costs and Total Cost 100 80 By increasing the quantity bought, advertising can lower average 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 materials $9 Production costs $8 Import duty $3 Selling costs $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 80 … markup 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 45 40 D 20 D … price falls and markup shrinks MR MR 0 50 75 100 150 200 250 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 50 100 125 150 200 250 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 ◆ 1 2 3 4 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 http://www.crn.com 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 50 D MR 0 3 6 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 economic profit 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. ■ 400 400 350 300 250 MC Zero economic 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 6 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 increases. Whether monopolistic competition is inefficient depends on the value we place on product variety. Key Figures Figure 12.1 Figure 12.2 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 12.5 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 sweatshirts. P rice Quantity demanded (dollars per sweatshirt) (sweatshirts per week) Price and cost (dollars per pair) 0 100 20 80 40 60 60 40 80 20 100 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 60 40 20 D MR 0 50 150 200 100 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 economic loss? 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 problem 2. 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 run? 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 long run? f. Why, if Lite and Kool has excess capacity in the long run, doesn’t the firm decrease its capacity? 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 answer. 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 day. 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 profit? 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 coffee-centric experience. Time, April 7, 2008 a. Explain how Starbucks’ past attempts to maximize profits ended up eroding product differentiation. 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 Smart Balance? 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 said. … 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. P rice (dollars per lesson) Quantity demanded (lessons per month) Price and cost (dollars per bike) 0 250 50 200 100 150 150 100 200 50 250 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 350 300 250 200 D 150 100 MR 50 0 100 200 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 economic loss. 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 by advertising? b. If Bianca advertises, will her average total cost increase or decrease at the quantity produced? 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 short run. 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 plan. 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 shoe market. 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 iPhone. 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.

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