ib micro monopolistic competition - amazon s3 · basics of monopolistic competition •...
TRANSCRIPT
MonopolisticCompetition
IBEconomics:TheoryoftheFirm&MarketStructures
BasicsofMonopolisticCompetition
• Monopolisticcompetitionisaformofimperfectcompetition andcanbefoundinmanyrealworldmarketsrangingfromsandwichbarsandcoffeestoresinabusytowncentretopizzadeliverybusinessesinacityorhairdressersinalocalarea.• Carehomesforolderpeoplemightalsofitintothemarketstructureknownasmonopolisticcompetition• Monopolisticcompetitionissimilartoperfectcompetition,indeedsomeeconomistsregarditasmorerealistic,becausetheproductsaredifferentiated• Productdifferentiationmeansthatbusinesseshavesomecontrolovertheirproducts,itimpliesthatfirmshavesomeprice-settingpower,ARslopesdownwards
ExamplesofMonopolisticCompetition
Shoerepairsandkeymakers
Taxiandminibuscompanies
Sandwichbarsandcoffeestores
Hairdressingsalons
Dry-cleanersandlaunderettes
BarsandNightclubs
Assumptions:MonopolisticCompetition
1. Therearemanyproducersandmanyconsumers- theindustryconcentrationratioislow
2. Consumersareawarethattherearenon-pricedifferencesamongproductsi.e.thereisslightproductdifferentiation– non-pricecompetitionisstrongandplentyofconsumerswitchingtakesplace
3. Producershavesomecontroloverprice- theyare“pricemakers”not“pricetakers”butthepriceelasticityofdemandishigherthanitwouldbeundermonopoly(thecross-priceelasticityishigh)
4. Barrierstoentryandexitarelow– thisallowsproducersrespondtochangingprofitsignalsandmeansprofitsarecompetedawayinthelongrun
ShortRunPrice,OutputandProfit
MC
PriceandCost
Output
AC
MR
AR
Firmshavedownward-sloping demandcurvesbecausetheyhavesomedegreeofprice-settingpower
ShortRunPrice,OutputandProfit
MC
PriceandCost
Output
AC
MR
AR
P1
Q1WeassumethatfirmsareprofitmaximiserswhereMC=MR
ShortRunPrice,OutputandProfit
MC
PriceandCost
Output
AC
MR
AR
P1
Q1
C1
SupernormalProfit
AtpriceP1andQ1,supernormal profitsarebeingmadebecausePrice>AC
ExplainingAdjustmenttotheLongRun• Intheshortrun,profitscompetinginmonopolisticcompetitivemarketscanbeatanylevel• Unlikemonopoly,therearenobarrierstoentry• Sothepresenceofsupernormalprofitsactsasasignal• Thismeansthatshort-runsupernormalprofitattractsnewproducerswithnewproducts andsonormalprofitsonlyaremadeinthelongrunequilibriumi.e.whereAR=AC• Asmorefirmsenterthemarket,thedemandcurveforanyexistingfirmshiftstotheleftasconsumersopttobuyproductsofferedbyneworalternativecompanies.• ThedemandcurvecontinuestomovetotheleftuntilitistangentialtotheACcurve.• Atthispoint,themonopolisticallycompetitivefirmisatitsprofit-maximisinglevelofoutput(becauseMR=MC)butisalsomakingonlynormalprofit(becauseAR=AC)
(1)ShortRunPrice,OutputandProfit
MC
PriceandCost
Output
AC
MR1
AR1
P1
Q1
C1
(2)LongRunPrice,OutputandProfit
MC
PriceandCost
Output
AC
MR2
AR2
P2
Q2
Inthelong runequilibrium,theaveragerevenuecurveistangentialtoAC–meaningnormalprofitsarebeingmade
AStableLREquilibriumisUnlikely
• Inthelongrunequilibriuminmonopolisticcompetition,therepresentativefirminthemarketismakingnormalprofits.• Inreality,astableequilibriummaynotbereachedsincenewproductscomeandgo,andsomenaturallydobetterthanothers.Themarketmaybeinastateofconstantflux.• Existingproductswithinamarketwilltypicallygothroughaproductlifecyclethataffectsthevolumeandgrowthofsales• Thelengthoftheproductlifecyclevariesfrommarkettomarket.Manybusinessesspendheavilyonmarketing/innovationtoextendthelifeofprofitablebrands
MonopolisticCompetition&Efficiency
1. Pricesareabovemarginalcost– meaningthattheequilibriumisnotallocativelyefficient
2. Saturationofthemarketmayleadtobusinessesbeingunabletoexploitfullyeconomiesofscale- causingaveragecosttobehigher– thereforenotproductivelyefficient
3. Criticsofheavyspendingonmarketingandadvertisingarguethatmuchofthisspendingiswastefulandaninefficientuseofscarceresources.
4. Debateoverthesocialcostsofpackagingandnegativeexternalitiesislinkedtomonopolisticcompetition
5. Monopolisticcompetitionassociatedwithextensiveconsumerchoiceandinnovation– goodfordynamicefficiency
CaseStudy:UKTaxiIndustry
AddisonLeeFoundedbyminicabdriverJohnGriffinin1975withjustonecar,Addison Leehasbecomea
majorcompetitortoLondon'sblackcabsandnowcarriesmorethan10mpassengersayear.
BoughtbyCarlyle,theUShedgefundmanagerinJuly2013
PrivatehirevehiclesMinicabscannotbehailedfromthestreetandmustrelyon
telephoneandinternetbookingsandwalk-inreservations.Mostprivatehirevehicles arelicensedbuttherearealsosomeun-
licensedoperators
LondonBlackTaxisThereareover23,000blackcabdrivers.Entryisrestrictedtothosewithlicenceanddriverswhohave
passed“theKnowledge”
Afragmentedmarket;Thereareanestimated78,000taxisand153,000licensedprivatehirevehiclesinEnglandandWales.80%ofUKtaxisarerelativelysmallowner-operatorbusinesses.Theindustryasawholegeneratesrevenuesofnearly£9billionperyear
CaseStudy:UKTaxiIndustry
19.2 20.5 20.8 20.8 21.6 22.3 22.6 22.2
42.1 42.645.9 47.3
52 53.6 55.4 55.8
0
10
20
30
40
50
60
70
80
90
1999 2001 2004 2005 2007 2009 2011 2013
Taxisinthousands
London England/Wales
CreativeDestruction?TheRiseofUber
• ThetaximarketinLondonandmanyothercitieshasbeendisruptedbythearrivalofUber– asmartphonebasedcabservicethatallowsuserstohailacabusingtheirmobiledeviceandwhichissignificantlycheaperthantraditionalblackcabs.• Rememberthattechnologyactsasadisruptiveforceovercomingbarrierstoentry.InsomecitiesUberhasbeenbanned,notleastinplaceswhereestablishedtaxioperatorshavepoliticalinfluence.• Uberusesasurge-pricingmodel– thefareschargedarehigherwhendemandisrisingatpeaktimes.Thisisanexampleofpricediscriminationinordertomaximiserevenue.
Price&Non-PriceCompetitioninGymMarket
• TheUKgym/healthclubindustrygenerates>£2billionofrevenuesannuallywithover1,500businessesemployingnearly40,000people• Gymsandfitnesscentresareconcentratedinurbanareaswherehighpopulationdensitymakesbusinessesmorecommerciallyviable• Themarketpositionofmid-marketgymshascomeunderpressureinrecentyears.• Consumersareswitchingtowardsbudgetgyms,whichdonotrequirelong-termcontractsandchargelessbecausetheyonlyofferbasicservices
Price&Non-PriceCompetitioninGymMarket
PayasyougoBasicequipmentOftenoutoftown
Manyopen24hoursDryfacilitiesonly–
gym,classes
BudgetGyms
• Membershipsubscriptions
• Wet(spa,pool)anddryfacilities
• Carparking• Restaurants• Tailoredinstruction
Mid-RangeGyms
MonopolisticCompetition
IBEconomics:TheoryoftheFirm&MarketStructures