This slideshow was written by Ken Chapman, but is substantially based on concepts from Modern Industrial Organization by Carlton and Perloff, 4th edition, McGraw-Hill.

1
Monopolistic Competition

• Market Power, but zero profit in the long run
• Differentiated products
• Representative Consumer Models
• People have a taste for variety
• Location Models
• Different people want different things
• Effect on Demand
• Inverse demand Pi D(q1, q2,, qn)100-2q1-3 q2

Linear Example n2
2
Representative Consumer, Undifferentiated
Products
Cournot Example
Answer from Ch. 6
3
Representative Consumer, Undifferentiated
Products Figure 7.1
Cents
Monopolistically Competitive Equilibrium
46
44
36
AC
MC
28
Output
80
4
Representative Consumer, Undifferentiated
Products

• Summary
• What happens as F increases?
• To price?
• To the number of firms?
• To profit?
• To Total Surplus (Welfare)?
• Suppose products are differentiated
• What happens to demand?
• What happens to Welfare?
• Is there sufficient product variety?

5
Figure 7.3


E
D
CS
B
AC
Demand
R
AC
C
Demand
Quantity, q
Quantity, q
6
Location Model

• Hotelling Fixed Prices

1
0
7
Bertrand Competition Linear Town
PB
PA
x
1
.6
.2
0
100 people live in town
8
Finding Demand
9
Finding The Reaction Functions
10
Bertrand Equilibrium
11
What is the Bertrand/Nash Equilibrium?
12
Conclusions?

• Principle of Maximum differentiation
• Complications
• Be where the demand is
• Positive externalities between firms
• Price regulation

13
RTE Breakfast Cereals

• 1972 FTC charge against the 4 largest RTE
  Breakfast serial manufacturers that brand
  proliferation was used to prevent entry.
• 1950-1972 6 leading producers introduced 80
  brands and had 95 of all cereal sales
• Didnt enter the natural cereals market, and many
  companies moved into that market Niche.