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110Ch13 - Chapter 13 Monopolistic Competition and Oligopoly...

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Chapter 13: Monopolistic Competition and Oligopoly – Objectives Define and identify monopolistic competition Explain how output and price are determined in a monopolistically competitive industry Explain why advertising costs are high in a monopolistically competitive industry Define and identify oligopoly Explain two traditional oligopoly models Use game theory to explain how price and output are determined in oligopoly Use game theory to explain other strategic decisions
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Monopolistic Competition Monopolistic competition is a market with the following characteristics: A large number of firms. Each firm produces a differentiated product. Firms compete on product quality, price, and marketing. Firms are free to enter and exit the industry.
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Monopolistic Competition Large Number of Firms The presence of a large number of firms in the market implies: Each firm has only a small market share and therefore has limited market power to influence the price of its product. Each firm is sensitive to the average market price, but no firm pays attention to the actions of the other, and no one firm’s actions directly affect the actions of other firms. Collusion, or conspiring to fix prices, is impossible.
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Monopolistic Competition Product Differentiation Firms in monopolistic competition practice product differentiation , which means that each firm makes a product that is slightly different from the products of competing firms. Competing on Quality, Price, and Marketing Quality includes design, reliability, and service. Because firms produce differentiated products, each firm has a downward-sloping demand curve for its own product. But there is a tradeoff between price and quality. Differentiated products must be marketed using advertising and packaging.
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Monopolistic Competition Entry and Exit There are no barriers to entry in monopolistic competition, so firms cannot earn an economic profit in the long run.
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Output and Price in Monopolistic Competition The Firm’s Short-Run Output and Price Decision A firm that has decided the quality of its product and its marketing program produces the profit maximizing quantity at which its marginal revenue equals its marginal cost ( MR = MC ). Price is determined from the demand curve for the firm’s product and is the highest price the firm can charge for the profit-maximizing quantity.
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Output and Price in Monopolistic Competition The figure shows a short-run equilibrium for a firm in monopolistic competition. It operates much like a single-price monopolist.
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Output and Price in Monopolistic Competition The firm produces the quantity at which price equals marginal cost and sells that quantity for the highest possible price.
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