MC & Oligopoly - Monopolistic Competition A...

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Monopolistic Competition A monopolistically competitive industry is somewhere between a perfectly competitive industry and a monopoly. It shares attributes with both. Characteristics of monopolistic competition x A large number of firms compete x Each firm produces a differentiated product x Firms compete on price and quality x Free entry and exit Implications of a large number of firms x Firms have limited market power – they can deviate from the prices of other firms by only a small amount x Firms care about the average price, but not the price of any one specific firm x Because of the large number of firms collusion is impossible
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Product Differentiation – each firm makes a product or supplies a service that is slightly different from the products or services supplied by other firms. Ways in Which Products are Differentiated x Price x Quality x Marketing (Advertising and Packaging) x Location Entry and Exit – In the short run there is free entry and exit from a monopolistically competitive industry. When firms are making positive profit in a monopolistically competitive industry – new firms will enter. When losses are incurred some firms will leave the industry.
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Price and Output in a Monpolistically Competitive Industry Firms operating in a monopolistically competitive industry produce the level of output that equates marginal revenue with marginal cost. $ MC ATC P * Q Q* MR
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Long Run Equilibrium in a Perfectly Competitive Industry In the long-run the entry of new firms in the industry in response to super normal economic profits results in the demand curve facing a representative firm to shift in to the point that it no longer makes economic profits. This looks much like the monopoly rent seeking equilibrium, but in profits were eroded by shifts in the cost curve, not the demand curve.
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Long Run Equilibrium in a Perfectly Competitive Industry $ MC ATC P * Q Q* MR
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Monopolistic Competition and Efficiency $ MC ATC P * Q Q* MR The monopolist competition picture is basically the same as the monopoly picture, so we know that there DWL
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Some Additional Efficiency Considerations Some would argue that firms in a monopolistically competitive industry are closer to efficiency then we are led to believe Product Innovation and Development Has Benefits x Some product developments and innovations are real – Starbucks coffee came along with better beans and a darker roast of coffee which people really enjoyed. x Dodge started putting side doors in its minivans cap pickups and made consumers better off. x On the other hand many so called improvements are aesthetic changes to a product. Marketing – Marketing is a large part of the budget of monopolistically competitive firms. Like production innovation the jury is divided on whether these huge marketing costs benefit or hurt consumers.
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This note was uploaded on 12/14/2011 for the course ECON 101 taught by Professor Hansen during the Fall '07 term at University of Wisconsin.

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MC & Oligopoly - Monopolistic Competition A...

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