Monopolistic Competition

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Monopolistic Competition
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Monopolistic Competition (m.c.)

• large number of independent sellers
• no or low barriers to entry
• differentiated product

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differentiated products

• products that are distinguished from similar
  products by such characteristics as quality
  design and location.
• examples service stations aspirin tissues
  retail stores

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Demand Curve for the Monopolistic Competitors
Product

• Since the product is differentiated there is
  some brand loyalty and the firm has some control
  over price.
• Since there are good substitutes available
  however the demand curve is fairly elastic.

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• The demand curve for the monopolistic
  competitors product is flatter than the demand
  curve for the monopolists product but not
  horizontal like the demand curve for the perfect
  competitors product.
• p.c. m.c.
  monopoly

P
P
P
D
D
D
Q
Q
Q
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• Apart from the fact that the demand curve for
  the monopolistic competitors product is
  technically flatter than the demand curve for the
  monopolists product the graphs look essentially
  the same.

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Monopolistic Competitor making positive economic
profits
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Profit-maximizing output where MR MC
MC

ATC
MR
D
quantity
Q
9
Determine the price from the demand curve above
Q.
MC

ATC
P
MR
D
Q
quantity
10
Determine the cost per unit from the ATC curve
above Q.
MC

ATC
P ATC
MR
D
Q
quantity
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Determine the TR PQ box.
MC

ATC
P ATC
MR
D
Q
quantity
12
Determine the TC ATC . Q box.
MC

ATC
P ATC
MR
D
Q
quantity
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The difference between TR and TC is profit.
MC

ATC
P ATC
profit
MR
D
Q
quantity
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Monopolistic Competitor with a loss
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Profit-maximizing or loss-minimizing output
where MR MC
ATC
MC

AVC
MR
D
quantity
Q
16
Determine the price from the demand curve above
Q
ATC
MC

AVC
P
MR
D
quantity
Q
17
Determine the cost per unit from the ATC curve
above Q
ATC
MC

AVC
ATC P
MR
D
quantity
Q
18
Determine the TC ATC . Q box
ATC
MC

AVC
ATC P
MR
D
quantity
Q
19
Determine the TR PQ box.
ATC
MC

AVC
ATC P
MR
D
quantity
Q
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The difference between TR and TC is profit or
loss.
ATC
MC

AVC
ATC P
loss
MR
D
quantity
Q
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Monopolistic Competitor Breaking Even (Zero
Economic Profit)
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Profit-maximizing output where MR MC
(directly below the tangency of D and ATC)
MC

ATC
MR
D
quantity
Q
23
Determine the price from the demand curve above
Q
MC

ATC
P
MR
D
quantity
Q
24
Determine the cost per unit from the ATC curve
above Q
MC

ATC
ATC P
MR
D
quantity
Q
25
Determine the TR PQ box.
MC

ATC
ATC P
MR
D
quantity
Q
26
Determine the TC ATC . Q box.
MC

ATC
ATC P
MR
D
quantity
Q
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Since TR TC profit is zero.
MC

ATC
ATC P
MR
D
quantity
Q
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Possibilities for the Monopolistic Competitor

• short run positive profits losses
  or breaking even.
• long run breaking even.

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Similarities between perfect competition and
monopolistic competition

• Profits must be zero in long run equilibrium.
• Firms are responsive to changes in demand
  conditions.
• Competition in the pursuit of profit encourages
  resource movements that are efficient.

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Differences between perfect competition and
monopolistic competition

• In long run equilibrium the perfectly
  competitive firm is at the minimum of the ATC
  curve. The monopolistically competitive firm is
  not.
• For perfectly competitive firms P MC. For
  monopolistically competitive firms P gt MC.
• Perfectly competitive firms dont advertise
  because everyone knows the products are all the
  same. Monopolistic competitors advertise to
  convince consumers that their product is better
  than others.

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Price Discrimination

• when a seller charges different prices to
  different consumers for the same product or
  service.

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Examples

• Charging different prices for movie admission to
  students and senior citizens and to other
  customers is price discrimination.
• Charging different prices for movie admission on
  a Wednesday afternoon and on a Saturday night is
  not price discrimination because the products are
  not the same.

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Requirements for Price Discrimination to Occur

• Firm must have some control over price. (So
  perfect competitors can not price discriminate
  but monopolistic competitors monopolists and
  oligopolists can.)
• Firm must be able to separate consumers into
  different identifiable groups.
• The different groups must have different
  elasticities.

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• The price discriminating firm charges the
  group with the higher elasticity a lower price.