11.1What is monopolistic competition?
Features of Monopolistic Competition
A market in which many firms compete, and implications arise:
o Each firm has a relatively small share of the market.
o No firm can dictate market conditions.
o Collusion is not viable.
Collusion – Illegal cooperation or conspiracy to cheat or deceive others. It can
occur when firms restrict output in order to set the price higher than the
equilibrium price.
o Firms are independent of each other.
Differentiated Product – Can be actual differences (e.g., cell phones with slightly different styles
and features), or perceived differences (e.g., Apple claiming iPhones are better than Samsung
phones); enables firms to compete in three areas:
o Quality (e.g., design, reliability, services)
o Price
o Marketing
No barriers to entry or exit, where:
o Firms make zero economic profit in the long run.
o In the short-run, firms will enter the market if existing firms are making an economic
profit and vice versa.
Defining Feature of Monopolistic Competition
Main difference between perfect competition and monopolistic competition is product
differentiation.
o Firms in perfect competition produce goods/services that are standardized or
homogenous in nature.
o Firms in monopolistic competition produce goods/service that are heterogenous.
A firm in monopolistic competition has a downward-sloping demand curve, as opposed to
perfectly elastic in perfectly competitive markets.
o The more rivals, the weaker the product differentiation, the more elastic the demand
curve.
o Can somewhat set the price.
Downward sloping MR curve; natural consequence of a downward-sloping demand curve.
11.2 Price and Output in Monopolistic Competition
The Firm’s Short-Run Output and Price Decision
Introduction
MR = MC, profit maximizing quantity.
Price is determined from the demand for the firm’s product and is the highest price that the firm
can charge for the profit-maximizing quantity.
This study source was downloaded by 100000891127392 from CourseHero.com on 10-04-2024 10:41:44 GMT -05:00
, Operates like a single-price monopoly.
Economic profit when P > ATC.
Profit Maximizing might be Loss Maximizing
May incur economic loss in the short-run, where at the profit maximizing quantity (MR = MC), P
< ATC.
Long Run: Zero Economic Profit
If P > ATC, firms enter the market; economic profit induces entry in the long run.
As firms enter the industry, existing firms lose some of its market share, and demand decreases
until each firm earns zero economic profit (P = ATC).
Decrease in demand decreases profit maximizing quantity (MR = MC) and lowers the maximum
price a firm can charge.
This study source was downloaded by 100000891127392 from CourseHero.com on 10-04-2024 10:41:44 GMT -05:00
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