Chapter-011 - Characteristics 1 Chapter 11 Small market...

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11/7/2010 1 Monopolistic Competition and Oligopoly Chapter 11 Characteristics: 1) Small market shares No collusion Independent action 2) Product attributes ▫ Service Service ▫ Location Location Brand names and packaging Some control over price 11-2 3) Because monopolistic competitors are typically small firms, economies of scale are few and capital requirements are low. 4) The goal of non-price competition is to make price less of a factor in consumer purchases and make product differences a greater factor. 11-3 • Degree of concentration Degree of concentration: the extent to which the largest firms accounts for the bulk of the industry’s output. Two measures: a) Four-firm concentration ratio b) Herfindahl index: sum of the squared percentage market shares of all firms in the industry Four-firm concentration ratio = Output of 4 largest firms Total output in the industry Herfindahl index = (%S 1 ) 2 + (%S 2 ) 2 + (%S 3 ) 2 +elipsis + (%S n ) 2 Bade & Parkin (2009) Essentials of Economics Like a monopoly, At profit maximizing output, marginal cost will be less than price Marginal revenue is below price Like a perfect competitor, zero economic profits exist in the long run The monopolistic competitive firm has some monopoly power so the firm faces a downward sloping demand curve 16-6
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11/7/2010 2 •Firm’s demand curve ▫ Highly elastic. Because the monopolistically competitive seller has many competitors producing closely substitutable goods. ▫ The E d depends on the number of rivals and the degree of product differentiation. 11-7 Q P ATC Break even Q MC D MR A monopolistic firm can earn profits, losses, or break even in the short run Determining Profits Graphically: Monopolistic Competition Losses Break even Profits P ATC Losses ATC Profits ATC L ATC P 16-8 • Profits in the short-run: Firms Enter Highly elastic Competition will reduce economic profits, until the demand is tangent to the ATC: Normal profits. • Losses in the short-run: Firms Leave Some firms will exit Surviving firms will see demand curve shift to the right until is tangent to ATC: normal profits Quantity Price and Costs MR = MC MC MR D 3 ATC Q 3 P 3 = A 3 0 11-10 • Inefficient: in monopolistic competition, neither
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