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Monopolistic%20Competition

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Contents of the chapter: The meaning of monopolistic competition ... The economic significance of advertising and brand names ... advertising. brand names ... – PowerPoint PPT presentation

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Title: Monopolistic%20Competition


1
  • CHAPTER 16
  • Monopolistic Competition
  • and Product Differentiation
  • Principles of Microeconomics (Economics 102)
  • UNR, 2nd Summer Term, 2008
  • Luis Pires, PhD.

2
Contents of the chapter
  1. The meaning of monopolistic competition
  2. Product differentiation
  3. How monopolistic competition works how it
    determines prices and profits in the short run
    and the long run
  4. Monopolistic competition vs. Perfect competition
    Why monopolistic competition poses a trade-off
    between lower prices and greater product
    diversity
  5. The economic significance of advertising and
    brand names

3
1. The Meaning of Monopolistic Competition
  • Monopolistic competition is a market structure in
    which
  • there are many competing producers in an
    industry,
  • each producer sells a differentiated product, and
  • there is free entry into and exit from the
    industry in the long run.

4
2. Product Differentiation
  • There are three important forms of product
    differentiation
  • Differentiation by style or type Sedans vs.
    SUVs
  • Differentiation by location Dry cleaner near
    home vs. Cheaper dry-cleaner far away
  • Differentiation by quality Ordinary () vs.
    gourmet chocolate ()

5
3. How monopolistic competition works
The Monopolistically Competitive Firm in the
Short Run
6
Entry and Exit into the Industry Shift the Demand
Curve of Each Firm
7
The Long-Run Zero-Profit Equilibrium
8
4. Monopolistic Competition vs.Perfect
Competition
In the long-run equilibrium of a monopolistically
competitive industry, there are many firms, all
earning zero profit. Price exceeds marginal cost
so some mutually beneficial trades are
exploited. The following figure compares the
long-run equilibrium of a typical firm in a
perfectly competitive industry with that of a
typical firm in a monopolistically competitive
industry.
9
Comparing Long-Run Equilibrium in Perfect
Competition and Monopolistic Competition
10
5. Controversies about Product Differentiation
  • No discussion of product differentiation is
    complete without spending at least a bit of time
    on the two related issuesand puzzlesof
  • advertising
  • brand names
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