1、,Monopolistic Competition,Chapter 17,Copyright 2001 by Harcourt, Inc.All rights reserved. Requests for permission to make copies of any part of thework should be mailed to: Permissions Department, Harcourt College Publishers,6277 Sea Harbor Drive, Orlando, Florida 32887-6777.,The Four Types of Marke

2、t Structure,Monopoly,Oligopoly,Monopolistic Competition,Perfect Competition,Tap water Cable TV,Tennis balls Crude oil,Novels Movies,Wheat Milk,Number of Firms?,Type of Products?,Types of Imperfectly Competitive Markets,Monopolistic Competition Many firms selling products that are similar but not ide

3、ntical. Oligopoly Only a few sellers, each offering a similar or identical product to the others.,Monopolistic Competition,Markets that have some features of competition and some features of monopoly.,Attributes of Monopolistic Competition,Many sellers Product differentiation Free entry and exit,Man

4、y Sellers,There are many firms competing for the same group of customers. Product examples include books, CDs, movies, computer games, restaurants, piano lessons, cookies, furniture, etc.,Product Differentiation,Each firm produces a product that is at least slightly different from those of other fir

5、ms. Rather than being a price taker, each firm faces a downward-sloping demand curve.,Free Entry or Exit,Firms can enter or exit the market without restriction. The number of firms in the market adjusts until economic profits are zero.,Monopolistic Competitors in the Short Run.,(a) Firm Makes a Prof

6、it,Quantity,0,Price,Demand,MR,ATC,MC,Monopolistic Competitors in the Short Run.,Quantity,0,Price,Demand,MR,(b) Firm Makes Losses,MC,ATC,Monopolistic Competition in the Short Run,Short-run economic profits encourage new firms to enter the market. This: Increases the number of products offered. Reduce

7、s demand faced by firms already in the market. Incumbent firms demand curves shift to the left. Demand for the incumbent firms products fall, and their profits decline.,Monopolistic Competition in the Short Run,Short-run economic losses encourage firms to exit the market. This: Decreases the number

8、of products offered. Increases demand faced by the remaining firms. Shifts the remaining firms demand curves to the right. Increases the remaining firms profits.,The Long-Run Equilibrium,Firms will enter and exit until the firms are making exactly zero economic profits.,A Monopolistic Competitor in

9、the Long Run.,Quantity,Price,0,Demand,MR,ATC,MC,Two Characteristics of Long-Run Equilibrium,As in a monopoly, price exceeds marginal cost. Profit maximization requires marginal revenue to equal marginal cost. The downward-sloping demand curve makes marginal revenue less than price.,Two Characteristi

10、cs of Long-Run Equilibrium,As in a competitive market, price equals average total cost. Free entry and exit drive economic profit to zero.,Monopolistic versus Perfect Competition,There are two noteworthy differences between monopolistic and perfect competitionexcess capacity and markup.,Excess Capac

11、ity,There is no excess capacity in perfect competition in the long run. Free entry results in competitive firms producing at the point where average total cost is minimized, which is the efficient scale of the firm.,Excess Capacity,There is excess capacity in monopolistic competition in the long run

12、. In monopolistic competition, output is less than the efficient scale of perfect competition.,Excess Capacity.,Quantity,(a) Monopolistically Competitive Firm,(b) Perfectly Competitive Firm,Quantity,Price,P = MR (demand curve),MC,ATC,Price,Demand,MC,ATC,P = MC,P,Markup Over Marginal Cost,For a compe

13、titive firm, price equals marginal cost. For a monopolistically competitive firm, price exceeds marginal cost.,Markup Over Marginal Cost,Because price exceeds marginal cost, an extra unit sold at the posted price means more profit for the monopolistically competitive firm.,Markup Over Marginal Cost.

14、,Quantity,(a) Monopolistically Competitive Firm,(b) Perfectly Competitive Firm,Quantity,Price,P = MC,P = MR (demand curve),MC,ATC,Quantity produced,Price,P,Demand,Marginal cost,MC,ATC,MR,Quantity produced,Monopolistic versus Perfect Competition.,Quantity,(a) Monopolistically Competitive Firm,(b) Per

15、fectly Competitive Firm,Quantity,Price,P = MR (demand curve),MC,ATC,Quantity produced,Efficient scale,Price,P,Demand,MC,ATC,P = MC,MR,Quantity produced = Efficient scale,Monopolistic Competition and the Welfare of Society,Monopolistic competition does not have all the desirable properties of perfect

16、 competition.,Monopolistic Competition and the Welfare of Society,There is the normal deadweight loss of monopoly pricing in monopolistic competition caused by the markup of price over marginal cost. However, the administrative burden of regulating the pricing of all firms that produce differentiate

17、d products would be overwhelming.,Monopolistic Competition and the Welfare of Society,Another way in which monopolistic competition may be socially inefficient is that the number of firms in the market may not be the “ideal” one. There may be too much or too little entry.,Monopolistic Competition an

18、d the Welfare of Society,Externalities of entry include: product-variety externalities. business-stealing externalities.,Monopolistic Competition and the Welfare of Society,The product-variety externality: Because consumers get some consumer surplus from the introduction of a new product, entry of a

19、 new firm conveys a positive externality on consumers.,Monopolistic Competition and the Welfare of Society,The business-stealing externality: Because other firms lose customers and profits from the entry of a new competitor, entry of a new firm imposes a negative externality on existing firms.,Adver

20、tising,When firms sell differentiated products and charge prices above marginal cost, each firm has an incentive to advertise in order to attract more buyers to its particular product.,Advertising,Firms that sell highly differentiated consumer goods typically spend between 10 and 20 percent of reven

21、ue on advertising. Overall, about 2 percent of total revenue, or over $100 billion a year, is spent on advertising.,Advertising,Critics of advertising argue that firms advertise in order to manipulate peoples tastes. They also argue that it impedes competition by implying that products are more diff

22、erent than they truly are.,Advertising,Defenders argue that advertising provides information to consumers They also argue that advertising increases competition by offering a greater variety of products and prices. The willingness of a firm to spend advertising dollars can be a signal to consumers a

23、bout the quality of the product being offered.,Brand Names,Critics argue that brand names cause consumers to perceive differences that do not really exist.,Brand Names,Economists have argued that brand names may be a useful way for consumers to ensure that the goods they are buying are of high quali

24、ty. providing information about quality. giving firms incentive to maintain high quality.,Summary,A monopolistically competitive market is characterized by three attributes: many firms, differentiated products, and free entry. The equilibrium in a monopolistically competitive market differs from perfect competition in that each firm has excess capacity and each firm charges a price above marginal cost.,Summary,Monopolistic competition does not have all of the desirable properties of perf