Principles of Economics- Mankiw (5th) 381

Principles of Economics- Mankiw (5th) 381 - CHAPTER 17...

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CHAPTER 17 MONOPOLISTIC COMPETITION 391 Goldman notes that “these arguments are clear enough and sound as if they might have been written by a bourgeois apologist.” QUICK QUIZ: How might advertising make markets less competitive? How might it make markets more competitive? ± Give the arguments for and against brand names. CONCLUSION Monopolistic competition is true to its name: It is a hybrid of monopoly and com- petition. Like a monopoly, each monopolistic competitor faces a downward- sloping demand curve and, as a result, charges a price above marginal cost. As in a competitive market, however, there are many firms, and entry and exit drive the profit of each monopolistic competitor toward zero. Because monopolistically competitive firms produce differentiated products, each firm advertises in order to attract customers to its own brand. To some extent, advertising manipulates con- sumers’ tastes, promotes irrational brand loyalty, and impedes competition. To a larger extent, advertising provides information, establishes brand names of reli-
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This note was uploaded on 07/30/2010 for the course ECON 120 taught by Professor Abijian during the Spring '10 term at Mesa CC.

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