Competitive Market Monopolistic Competition Monopoly

1. Properties
Many firms -Many firms Only one firm
Sell the identical products -Sell the differentiated products. E.g. No closed substitutions
shampoo: Clear, Headshore, Xman…
No market power Price Taker Still have market power (Negligible)  Significant market power  Price
Maker
Free Entry and Exit Free Entry and Exit No Entry and Exit
2. Features
2.1. Demand curve: horizontal line (Edp= 2.1.Demand Curve (like monopoly): 2.1. Demand curve: downward sloping
infitity) perfectly elastic downward sloping curve curve
(D): P= a-bQ (D): P= a-bQ
As compared to the monopoly, the slop The slope is relatively steep Reflect the
of demand curve is flatter reflecting the market power of monopoly. (Relationship
market power of firm in this market is between market power and elasticity level)
weak.
2.2. Marginal Revenue: MR coincides with 2.2. Marginal Revenue like monopoly 2.2. Marginal Revenue
demand curve: MR=P* where P* is the TR=P*Q=(a-bQ)*Q=aQ-bQ^2 TR=P*Q=(a-bQ)*Q=aQ-bQ^2
market price.  MR=TR’(Q)= a-2bQ  MR=TR’(Q)= a-2bQ
2.3. Maximizing the profit: MR=MC=P* 2.3. Maximizing the profit: MR=MC<P 2.3. Maximizing the profit: MR=MC<P
2.4. Supply curve: is MC when P> AVCmin 2.4. No Supply curve
2.5. only Quantity Effect (The only way 2.5. Both the Price Effect and Quantity 2.5. Both the Price Effect and Quantity
firm that can improve the total revenue is Effect because of downward sloping Effect because of downward sloping curve
to increase the quantity) curve
2.6. Competitive market is the most 2.6. Monopoly is not the effective market 2.6. Monopoly is not the effective market
effective market since NSB =CS+PS is the since DwL>0 since DwL>0
largest and there is no deadweight loss
2.7. Break-even point: P = ATCmin 2.7. Break-even point: P = ATC 2.7. Break-even point: P = ATC
The long-term equilibrium: Profit=0 P=ATC because of free entry and exit that only
exist in the perfect competition and monopolistic competition.
 If positive profits new entrants profit decreases to zero
 If negative profits exiting firms exit loss decreases to zero
 Therefore, in the long-run equilibrium, the profit is zero.
The long-term equilibrium: P = ATCmin long-term equilibrium: P = ATC

TR=P*Q

According the law of demand: P increase  Q decrease

Changes in P and Q cause changes in TR

 P increases TR increases Price Effect

 Q decrease TR decreases Quantity Effect

In the competitive market, P* is market price, thus it is constant The only way firm that can improve the total revenue is to increase
the quantity.

In the monopolistic market,

2.6. Competive market is the most effective market in term of Welfare

By compare the competitive market and monopoly in term Price, Quantity, Net Social Benefit

Net Social Benefit (NSB)= Consumer’s Surplus (CS)+ Producer’s Surplus (PS)

 Competitive market is considered as the most effective market (NSB is maximized in the competitive market)
 Monopoly decreases their quantity and then price will increase Qm<Qc and Pm>Pc
 Welfare Analysis: There is the deadweight loss (DwL) in the monopoly.

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