13%20Monopolistic%20Competition%20and%20Trade

13%20Monopolistic%20Competition%20and%20Trade -...

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1 1 • Introduction and Assumptions • The Monopolistic Competition Model • Monopolistic Competition and Trade • The Pattern of Trade • Intra- versus Inter-Industry Trade 2 Introduction • In practice pure monopoly is rare. • The usual market structure in industries characterized by internal economies of scale is oligopoly , but it is very difficult to analyze. • A special case of oligopoly, monopolistic competition , is relatively easy to analyze. 3 Assumptions Assumption #1: The are many firms . 4 Assumptions Assumption #2: Each firm produces a differentiated product .
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2 5 Assumptions Assumption #3: Each firm takes the prices charged by its rivals as given . 6 Assumptions Assumption #4: –T h e demand curve facing a typical firm is: Q = S * [ 1/n – b * ( P – P* ) ] –w h e r e Q is the firm’s sales, S is the total sales of the industry, n is the number of firms in the industry, b is a constant term representing the responsiveness of a firm’s sales to its price, P is the price charged by the firm, and P* is the average price charged by its competitors. 7 Assumptions Assumption #5: –T h e total sales of the industry is fixed . 8 Assumptions Assumption #6:
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3 9 Assumptions Assumption #7: –T h e r e i s free entry and exit of firms in response to profits in the industry. 10 Assumptions Assumption #8: There are economies of scale in production which are internal to the firm . 11 Assumptions Assumption #9: Consumer demand for differentiated products can be described by either: 1. The love of variety approach , or 2. The ideal variety approach . 12 Assumptions Assumption #9 (continued): –T
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4 13 Assumptions Assumption #9 (continued): –T h e ideal variety
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13%20Monopolistic%20Competition%20and%20Trade -...

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