ECN607 – Lectureaid_7.1

ECN607 – Lectureaid_7.1 - ECN607 Managerial...

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ECN607 – Managerial Economics Study Aid: lecture 7.1 Introduction Monopolistic competition is distinct from perfect competition and pure monopoly, but it still maximizes profits where marginal revenues equal marginal costs. In monopolistic competition, firms sell a differentiated product; thus, non-pricing strategies (e.g., advertising) play a more prominent role in its behavior. Branding and unique product features figure prominently in monopolistic competition. In an oligopoly, the market is dominated by a handful of firms who can influence not only the market price but also the behavior of other firms. Game theory will also be introduced. In industries dominated by a few firms, price leadership takes place whereby one firm sets a price to gain market share while rival firms decide whether to meet this price or pursue some other non-pricing strategy such as advertising. Strategies to prevent entry to the oligopoly market will be discussed. Monopolistic Competition In monopolistic competition, many sellers exist, though not as many as in perfect competition; however, the products are differentiated from one another. Entry and exit in the industry, as with perfect competition, is relatively easy. Characteristics of monopolistic competition include these:
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