Monopolistic Competition - PowerPoint PPT Presentation

Loading...

PPT – Monopolistic Competition PowerPoint presentation | free to download - id: 45a8f2-NDBiM



Loading


The Adobe Flash plugin is needed to view this content

Get the plugin now

View by Category
About This Presentation
Title:

Monopolistic Competition

Description:

Chapter 11 In This Chapter 11.1. Distinguishing Features of Monopolistically Competitive Markets 11.2. Profit Maximizing Price and Output Decisions 11.3. – PowerPoint PPT presentation

Number of Views:208
Avg rating:3.0/5.0
Slides: 34
Provided by: antho120
Learn more at: http://www.d.umn.edu
Category:

less

Write a Comment
User Comments (0)
Transcript and Presenter's Notes

Title: Monopolistic Competition


1
Monopolistic Competition
  • Chapter 11

2
In This Chapter
  • 11.1. Distinguishing Features of
    Monopolistically Competitive Markets
  • 11.2. Profit Maximizing Price and Output
    Decisions
  • 11.3. Problems of Monopolistically Competitive
    Markets

3
  • 11.1. Distinguishing Features of
    Monopolistically Competitive Markets

4
Structure
  • Monopolistic competition is a market in which
    many firms produce similar goods or services but
    each maintains some independent control of its
    own price.

5
Structure
  • A distinguishing structural characteristic of
    monopolistic competition is that there are many
    firms in the industry.
  • Many is somewhere between the few of
    oligopolies and the hordes that characterize
    perfect competition.

6
Low Concentration
  • Low concentration ratios are common in
    monopolistic competition.
  • Concentration ratio The proportion of total
    industry output produced by the largest firms
    (usually the four largest).

7
Market Power
  • Each producer in monopolistic competition is
    large enough to have some market power.
  • Market Power The ability to alter the market
    price of a good or service.

8
Market Power
  • A monopolistically competitive firm confronts a
    downward-sloping demand curve for its output.

9
Independent Production Decisions
  • Modest changes in the output or price of any
    single firm will have no perceptible influence on
    the sales of any other firm.

10
Independent Production Decisions
  • The relative independence of monopolist
    competitors means that they dont have to worry
    about retaliatory responses to every price or
    output change.

11
Low Entry Barriers
  • Another characteristic of monopolistic
    competition is the presence of low barriers to
    entry.
  • Barriers to entry Obstacles that make it
    difficult or impossible for would-be producers to
    enter a particular market, such as patents.

12
Behavior
  • Monopolistic competition has distinctive behavior.

13
Product Differentiation
  • One of the most notable features of
    monopolistically competitive behavior is product
    differentiation.
  • Product differentiation - Features that make one
    product appear different from competing products
    in the same market.

14
Brand Image
  • Each firm has a distinct identity a brand
    image.
  • Consumers perceive its output to be somewhat
    different than others in the industry.

15
Brand Loyalty
  • By differentiating their products, monopolistic
    competitors establish brand loyalty.
  • Brand loyalty gives producers greater control
    over the price of their products.

16
Brand Loyalty
  • Each firm only has a monopoly on its brand image.
  • It still competes with other firms offering close
    substitutes.

17
Brand Loyalty
  • Brand loyalty makes the demand curve facing the
    firm less price-elastic.
  • Brand loyalty implies that consumers shun
    substitute goods even when they are cheaper.

18
Brand Loyalty
  • Each monopolistically competitive firm will
    establish some consumer loyalty.
  • A symptom of brand loyalty is the price
    differences between computers which are
    essentially the same.

19
  • 11.2. Profit Maximizing Price and Output
    Decisions

20
Short-Run Price and Output
  • The monopolistically competitive firms
    production decision is similar to that of a
    monopolist.
  • Production decision - The selection of the
    short-run rate of output (with existing plant and
    equipment).

21
Short-Run Price and Output
  • As always, the profit-maximizing rate of output
    is achieved by producing the quantity where MR
    MC.

22
Entry and Exit
  • With low barriers to entry, new firms will enter
    the market if there is economic profit.
  • Economic profit The difference between total
    revenues and total economic costs.

23
Entry and Exit
  • When firms enter a monopolistically competitive
    industry
  • Thus, in the long run, there are no economic
    profits in monopolistic competition.
  • The market supply curve shifts to the right.
  • The demand curves facing individual firms shift
    to the left.

24
Equilibrium in Monopolistic Competition
25
Effects of Entry on Industry and Firm
Reduced market share
p1
p2
Later demand facing film
MR
26
Equilibrium in Monopolistic Competition
27
  • 11.3. Problems of Monopolistically Competitive
    Markets

28
Inefficiency
  • Monopolistic competition tends to be less
    efficient in the long run than a perfectly
    competitive industry.

29
Excess Capacity
  • Because of the industry-wide excess capacity,
    each firm produces a rate of output that is less
    than its minimum ATC.
  • I.e., the same level of industry output could be
    produced at lower cost with fewer firms.
  • The Industry has excess capacity

30
Flawed Price Signals
  • The monopolistically competitive firm will always
    price its output above the level of marginal cost.

31
Flawed Price Signals
  • Monopolistic competition results in both
    production inefficiency (above-minimum average
    cost) and allocative inefficiency (wrong mix of
    output).

32
Advertising Wars No Cease-Fire
  • In truly (perfectly) competitive industries,
    firms compete on the basis of price.
  • Imperfectly competitive firms engage in nonprice
    competition the most prominent form being
    advertising.

33
Advertising Wars No Cease-Fire
  • Advertising may be more responsible for brand
    loyalty than the taste of the product.
  • Having a recognizable name is worth billions in
    sales.
About PowerShow.com