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Unformatted text preview: 1 L8: L8: Monopolistic Competition Monopolistic Competition Principles of Microeconomics, SP 2010 1 (Chapter (Chapter 11) 11) Monopolistic Competition Monopolistic Competition Characteristics Characteristics Many firms Many firms Relatively easy entry Relatively easy entry Product differentiation Product differentiation Can set price at a level higher than the price established by perfect Can set price at a level higher than the price established by perfect competition competition Principles of Microeconomics, SP 2010 2 Use MR = MC rule to maximize profit Use MR = MC rule to maximize profit If earning above If earning above-normal profits, newcomers will enter the market normal profits, newcomers will enter the market Market supply curve shifts out and to the right Market supply curve shifts out and to the right Firm’s demand curve shifts down and to the left Firm’s demand curve shifts down and to the left Ultimately, in the long run, firms earn only normal profit Ultimately, in the long run, firms earn only normal profit Monopolistic Competition Monopolistic Competition: Characteristics and Occurrence Monopolistic competition refers to a market situation in which a relatively large number of sellers offer similar but not identical products. Each firm has a small percentage of the total market. Collusion is nearly impossible with so many firms. Principles of Microeconomics, SP 2010 3 Firms act independently; the actions of one firm are ignored by the other firms in the industry. Monopolistic Competition Product differentiation and other types of nonprice competition give the individual firm some degree of monopoly power that the purely competitive firm does not possess. Product differentiation may be physical (qualitative). Services and conditions accompanying the sale of the product are important aspects of product differentiation. Principles of Microeconomics, SP 2010 4 Location is another type of differentiation. Brand names and packaging lead to perceived differences. Product differentiation allows producers to have some control over the prices of their products. Similar to pure competition, under monopolistic competition firms can enter and exit their industries relatively easily. 2 Monopolistic Competition Monopolistic Competition: Price and Output Determination The firm’s demand curve is highly, but not perfectly, elastic....
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This note was uploaded on 04/15/2010 for the course ECON 2306 taught by Professor Bailiff during the Spring '08 term at UT Arlington.
- Spring '08
- Monopolistic Competition