Monopolistic CompetitionMicroeconomics FoundationAlaleh Mani2010

Features1- a large number of firms compete:

Small Share for every firm so only small deviation Ignore other firms with small share collusion among many firms for higher price agreement is impossible

2-Differentiated products (CFA 2009) with close substitution exp: different running shoes with different price, however the high priced good

never disappear from market (CFA 2008)3- Competing on:

-Quality or physical attribute: Nice Design Reliable quality Services provided Ease to access to product and its service

-Price more for higher quality in downward slope for demand -Marketing: Both higher quality and lower quality need to advertise

Advertising Packaging

Entry and Exit that cause a zero economic profit in long run

Economic profit and lossLossProfit

Break Even

Monopolistic competition and Monopoly The only different lies in what happens next

when firms either make an economic profit or economic loss .

It means see if the social demand can meet the average total cost of a firm

ATC in monopoly is in its minimum location however in monopolistic competition it differs

Demand curve for monopolistic competition firms due to close substitution of goods and services are more elastic than in monopoly firms

Monopolistic competition Vs Perfect Competition

Long Run Monopolistic competition with break even situation

Excess Capacity

Markup Min ATC

Excess Capacity Excess Capacity = Efficient Quantity –

Actual Quantity If firms sell more in less price to cover

the excess capacity they incur loss because P<ATC because demand do not meet ATC

Exp: vacant table in restaurant

Efficiency Since MSC ≠ MSB not efficient Product variety is valued and costly Design and Marketing for variety=Set up costs CONFORMITY IN PRODUCTS IS EFICIENT

BUT NOT ATTRACTIVE

Development and Marketing in Decision

Innovation (cfa 2009): for firm to restore the economic benefit in monopolistic sys is to gain innovation:

imitator and competitors innovate a close substitution to gain from initial advantages

1. Profit maximizing :Marginal revenue of a developed product must be equal to

Marginal cost of developing the product 2.Efficiency:Marginal Social Benefit of developed product must be

equal to marginal social cost of developing productMonopolistic Firms prefer profit maximizing to efficiency

Development and Marketing in Decision Advertisement: manipulate the consumer concept

of their product Expenditure: hard to estimate however

generally close to 15% of the price goes for ad. name as (selling cost) Advertisement Expenditure and selling cost

increase the costs and change the demand (Sweser 2009):

Costs Demand

Selling cost and total cost Ad and selling costs are FIXED COST so

ATC increases

With Ad cost

No Ad cost

Second Cost fall from

a to be

First Ad increase

demand

Selling cost and Demand Ad decrease the demand or other firms Make the demand curve more elastic Lower the markup and price

Again here efficiency is ambiguous sell more off- set the ad costs and make variety of production

Some points Advertisement of well known Firms like

Coca cola is to signaling about their serious remaining in the market

Brands: provide information of high quality

to consumer provide incentive to stick to high

quality standard to producer to meet the expectation