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1、17,Monopolistic Competition,Monopolistic Competition,Imperfect competition refers to those market structures that fall between perfect competition and pure monopoly.,The Four Types of Market Structure,Copyright 2004 South-Western,Monopolistic Competition,Types of Imperfectly Competitive MarketsMonop
2、olistic CompetitionMany firms selling products that are similar but not identical.OligopolyOnly 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.,Monopolistic Competition,A
3、ttributes of Monopolistic CompetitionMany sellersProduct differentiationFree entry and exit,Monopolistic Competition,Many SellersThere are many firms competing for the same group of customers.Product examples include books, CDs, movies, computer games, restaurants, piano lessons, cookies, furniture,
4、 etc.,Monopolistic Competition,Product DifferentiationEach firm produces a product that is at least slightly different from those of other firms.Rather than being a price taker, each firm faces a downward-sloping demand curve.,Monopolistic Competition,Free Entry or ExitFirms can enter or exit the ma
5、rket without restriction.The number of firms in the market adjusts until economic profits are zero.,COMPETITION WITH DIFFERENTIATED PRODUCTS,The Monopolistically Competitive Firm in the Short Run Short-run economic profits encourage new firms to enter the market. This:Increases the number of product
6、s offered.Reduces 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.,Figure 1 Monopolistic Competition in the Short Run,Copyright2003 Southwestern/Thomson Learning,Quantity,0,Price,(a) F
7、irm Makes Profit,COMPETITION WITH DIFFERENTIATED PRODUCTS,The Monopolistically Competitive Firm in the Short Run Short-run economic losses encourage firms to exit the market. This: Decreases the number of products offered.Increases demand faced by the remaining firms.Shifts the remaining firms deman
8、d curves to the right.Increases the remaining firms profits.,Figure 1 Monopolistic Competitors in the Short Run,Copyright2003 Southwestern/Thomson Learning,Quantity,0,Price,(b) Firm Makes Losses,The Long-Run Equilibrium,Firms will enter and exit until the firms are making exactly zero economic profi
9、ts.,Figure 2 A Monopolistic Competitor in the Long Run,Copyright2003 Southwestern/Thomson Learning,Quantity,Price,0,Long-Run Equilibrium,Two Characteristics As in a monopoly, price exceeds marginal cost.Profit maximization requires marginal revenue to equal marginal cost.The downward-sloping demand
10、curve makes marginal revenue less than price.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 mar
11、kup.,Monopolistic versus Perfect Competition,Excess CapacityThere 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.There is excess capacity in mo
12、nopolistic competition in the long run.In monopolistic competition, output is less than the efficient scale of perfect competition.,Figure 3 Monopolistic versus Perfect Competition,Copyright2003 Southwestern/Thomson Learning,Quantity,0,Price,(a) Monopolistically Competitive Firm,Quantity,0,Price,(b)
13、 Perfectly Competitive Firm,Monopolistic versus Perfect Competition,Markup Over Marginal CostFor a competitive firm, price equals marginal cost.For a monopolistically competitive firm, price exceeds marginal cost.Because price exceeds marginal cost, an extra unit sold at the posted price means more
14、profit for the monopolistically competitive firm.,Figure 3 Monopolistic versus Perfect Competition,Copyright2003 Southwestern/Thomson Learning,Quantity,0,Price,(a) Monopolistically Competitive Firm,Quantity,0,Price,(b) Perfectly Competitive Firm,Figure 3 Monopolistic versus Perfect Competition,Copyr
15、ight2003 Southwestern/Thomson Learning,Quantity,0,Price,(a) Monopolistically Competitive Firm,Quantity,0,Price,(b) Perfectly Competitive Firm,Monopolistic Competition and the Welfare of Society,Monopolistic competition does not have all the desirable properties of perfect competition.,Monopolistic C
16、ompetition 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 differentiated products would be overwhelming.,
