MONOPOLISTIC COMPETITION

BUSINESS ECONOMICS

Lizbeth Carolina Martnez Salas Brandon Stefan Origuel Carlon

A01610939 A01611132

Marcela Rivera Grimaldo Jos Antonio De vila Ros

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WHAT IS MONOPOLISTIC COMPETITION?

Definition

According to Gregory Mankiw, monopolistic competition is a "market structure

in which many companies sell similar but not identical products

Samuelson and Nordhaus define monopolistic competition as the "market

structure in which there are many sellers who offer goods that are close but

not perfect surrogates. In this type of market, each firm can influence to a

certain extent the price of its product"

WHAT IS MONOPOLISTIC COMPETITION?

Definition

According to Kotler, Arsmtrong, Cmara y Cruz, "a monopolistic competition

market consists of many buyers and sellers who negotiate on a range of prices, not

on a single market price. Consumers can offer variations on quality, performance

or style of the product, or additional services can be changed Consumers perceive

different products and therefore will pay different prices for them. Offers for the

different segments of the market and for this, in addition to the price, use other

tools such as advertising, branding and personal selling "

WHAT IS MONOPOLISTIC COMPETITION?

Definition

It is a kind of imperfect competition, where many producers sell similar

products in the market and they are not identical (heterogeneous product),

because they differ from one another by brand, quality or location.

In monopolistic competition, a firm takes the prices of its rivals as data and

overlooks the impact of its own prices on the prices of other companies.
WHAT IS MONOPOLISTIC COMPETITION?
Characteristics of monopolistic competition.

The monopolistic competition is an economic structure where various types of

markets exist. They sell similar products but those are never the same.

Its markets characteristics are:

*Many sellers: Many companies offer the same service or sell similar products.

*Product differentiation: Each company produces their own kind of product

with their own personal mark in order to make it different from the rest.

*Go in and go out freely: This makes the number of companies to fit gradually

until there are only the necessaries.

WHAT IS MONOPOLISTIC COMPETITION?

Strategies of Monopolistic Competition

The companies are constantly competing, because of that, they need to

make some strategies that helps them. Some of these are; Quality, Price, and

Marketing.

Quality: Design, Reliability, service, ease of access to the product.

Price: A reasonable exchange between price and quality.

Marketing: Advertising and product presentation.

 THE CHAMBERLAIN MODEL
Edward Chamberlin (May 18, 1899 July 16, 1967)

He was an American economist who developed various theories about industrial monopolies

and competition.

Chamberlin studied in the university of Iowa, where Frank H. Knight influenced him about

economics. Edward attempted graduate at the University of Michigan and in 1927 he obtained

a Ph.D. from Harvard University, where he studied the rest of career.

In 1933, Chamberlins doctoral thesis became the basis for Theory of Monopolistic

Competition, a book that encouraged discussion of competition, especially about firms whose

consumer preferences for particular products and firms that the controls their prices without

being monopolist. Also, he was who came up with the term product differentiation.
THE CHAMBERLAIN
MODEL
Model of the Monopolistic Competition

Equilibrium in Short-run
In the short-run, as shown in the second
figure, each firm will act as a monopolist in
its market. Given their demand and cost
curves they will maximize profits by
producing the level of output at which
marginal cost equals marginal revenue.
Whether they make profits or not will
depend on the cost structure. In our
example, there are no profits.
 Equilibrium in the long-run
In the long run, the cost structure of the firm varies,
allowing it to lower its prices in order to attract more
customers. Lets start analyzing the equilibrium in the long
run considering the firm is in this situation of equilibrium
(A), and because of its profits, it has no incentives for
changing its price. However, the extraordinary profits that
the firm is making will attract new competitors to the
market. Although aggregate demand in the market is
maintained, the entrance of new firms will translate into a
fall of the effective demand of the firm. This drop in the
demand of the firm is illustrated by the shift of the
demand curve to the left, from D to D and a new
equilibrium point will be reached at B.
EFFICIENCY IN MONOPOLISTIC COMPETITION
The purpose of the brand is to generate an immediate positive reaction from consumers
when they see a product or service being sold under a certain name in order to
increase sales. A brand and the associated reputation are built on advertising and
consumers' past experiences with the products associated with that brand.
Reputation among consumers is important to a monopolistically competitive firm
because it is arguably the best way to differentiate itself from its competitors. However,
for that reputation to be maintained, the firm must ensure that the products associated
with the brand name are of the highest quality. This standard of quality must be
maintained at all times because it only takes one bad experience to ruin the value of
the brand for a segment of consumers. Brands and advertising can thus help guarantee
quality products for consumers and society at large.
Advertising is also valuable to society because it helps inform consumers. Markets work
best when consumers are well informed, and advertising provides that information.
Advertising and brands can help minimize the costs of choosing between different
products because of consumers' familiarity with the firms and their quality.
Finally, advertising allows new firms to enter into a market. Consumers might be hesitant
to purchase products with which they are unfamiliar. Advertising can educate and
inform those consumers, making them comfortable enough to give those products a try.
INEFFICIENCY IN MONOPOLISTIC
COMPETITION

The firm is allocative and productively inefficient in both the

long and short run.

There is a tendency for excess capacity because firms can

never fully exploit their fixed factors because mass production
is difficult. This means they are productively inefficient in both
the long and short run. However, this is may be outweighed by
the advantages of diversity and choice.
As an economic model of competition, monopolistic
competition is more realistic than perfect competition - many
familiar and commonplace markets have many of the
characteristics of this model.
ADVERTISING AND BRANDING
(IMPACT ON MONOPOLISTIC
COMPETITION)
Firms are incentivized to advertise when selling differentiated
products above Marginal Cost (MC) in order to attract more buyers
(customers). In the highly differentiated product bracket, firms budget
10 to 20% of revenue to be spent on advertising.

Proponents of advertising argue that it provides information such as

the price of a product, the existence of new products, where they
can be found, in order to make better choices. This, in turn, helps
markets to allocate their resources efficiently.

Competitively speaking, the more consumers are informed of all the

firms offering coffee, the more easily they can take advantage of
price differences. Additionally, advertising can help newly launched
companies succeed more easily by attracting customers from
existing firms by promoting their differentiating qualities
ADVANTAGES OF MONOPOLISTIC
COMPETITION
Pricing
The ability to set higher prices is a primary advantage of monopolistic
competition. These companies can determine the items price points,
which tend to be much higher than perfectly competitive industries by
virtue of their branding efforts. Monopolistic competition is one reason
prescription drugs can be costly. Because companies are awarded
patents for pharmaceutical innovations, they capitalize on this
monopoly by charging high prices.
They are also high because of the lack of competition from other drug
companies.
 Product Quality and Development
An advantage of monopolistic competition is that it enhances a firm's
ability to improve a product's quality through its brand. Economists
defend branding as a way to enhance trust and reliability to the
consumer. Brands strengthen the need to maintain high quality based
on the businesss financial stake in its reputation.

Price Discrimination
Monopolies can engage in price discrimination, which is charging
different prices to different consumer groups. Companies in a
monopoly have the option of determining which customers receive
discounts or premiums on goods and services, such as senior citizens or
students receiving discounts.
 Considerations

Though companies gain significant advantages from

engaging in monopolistic competition, consumers
experience no such benefits. Branding does not always
signal the best value, as similar products perform similar
functions as other goods at a fraction of the price.
Additionally, price discrimination reduces consumer
surplus. In the case of regressive price discrimination or,
charging the poor at a higher percent than the wealthy,
social welfare is reduced, as well.
DISADVANTAGES OF MONOPOLISTIC
COMPETITION
There are several potential disadvantages associated
with monopolistic competition, including:
o Some differentiation does not create utility but generates
unnecessary waste, such as excess packaging. Advertising may
also be considered wasteful, though most is informative rather
than persuasive.
o As the diagram illustrates, assuming profit maximisation, there is
allocative inefficiency in both the long and short run. This is
because price is above marginal cost in both cases. In the long
run the firm is less allocatively inefficient, but it is still inefficient.
DIFFERENCES BETWEEN
PERFECT COMPETITION AND MONOPOLISTIC COMPETITION

In both cases there are many companies which are involve in the market.

In the Monopolistic Competition the products are differentiated by the

price, marketing, design, etc.

In the Perfect Competition the products are identical, they are not different,

like basics products.

DIFFERENCES BETWEEN
PERFECT COMPETITION AND MONOPOLISTIC COMPETITION

Number of
Companies

Some Many
One Company
Companies Companies

Kind of
Monopoly Oligopoly
Products

Differentiated Products Identical Products

(Monopolistic Competition) (Perfect Competition)
COMPETITION IN QUALITY, PRICE AND
MARKETING
QUALITY: Design, Reliability, service, ease of access to the product.
COMPETITION IN QUALITY, PRICE AND
MARKETING

PRICE: A reasonable exchange between price and quality.

COMPETITION IN QUALITY, PRICE AND
MARKETING
MARKETING: Advertising and product presentation.
INPUTS AND OUTPUTS

In monopoly competition there is free entry and exit of

companies in the industry. As a result, a company can reap
long-term economic benefits. When companies get the
economic benefits, new companies enter the industry, leading
to a reduction in prices and, sooner or later, the elimination of
economic benefits. When companies incur economic losses,
some leave the industry, thereby increasing prices and profits,
eliminating, long, economic loss. In the balance a long term,
there is no entry and exit of the companies, so those that are
part of the industry you get normal profits or equal a zero. An
example of this type of competition may be the women's
clothing market. Producers, although engaged in producing
clothing for women, do not make dresses the same as the
others, so that the products of one or the other are different by
quality, design, service in the sale, etc., making each product
Different from another without ceasing to be women 's
clothing.
NUMBER OF
COMPANIES

In monopolistic competition,
there are no barriers to entry or
exit. However, because of the
need to differentiate their
products, companies may
need to carry out non-price
operations, which in case of
no result, would put the
company on the market.
ECONOMIC EFFECT OF MONOPOLISTIC
COMPETENCE.
The economic effect of monopolistic competition is a global loss and little
recommen- dable of productive efficiency and distribution. Customers pay
more in return for what they could buy in a perfect competition system.
However, the effect is not as serious as monopolies and differentiated
products provide much sought after diversity. Even so, there are some
losses in overcapacity and in the use of non-price competition. Generic
product markets are approaching perfect competition, as they are
standardized. Products with a very similar name (eg biscuits) are in
monopolistic competition because they are not exactly identical items, but
rather different from each other. Customers have to pay a high price for
branded products (like Nabisco or Keebler) but they do not seem to care
too much.
DEMAND IN MONOPOLISTIC
COMPETITION

In monopolistic competition the demand of a company

is downward since customers prefer differentiated
products. However, since there are many substitutes
very similar (or even perfect) within reach of anyone, the
demand is very elastic. Graphically, this means that
demand in monopolistic competition is more horizontal than in
a monopoly.
EXAMPLES

If I would like to buy a car, I should know which are my necessities that
need to be cover:

To drive in the city, like to go to school, to my house, to go out with my

friends.
I will have to pay for the maintenance of the car and the gasoline, using
the money that I make.
A car with enough space to go out with my friends.

The next 6 comparison categories are to know which car suits me best,
between many companies that offer different kinds of cars.
 EXAMPLES
CATEGORY AUDI TT BMW M6 MERCEDES BENZ AMG
PRICE $630,000 $2,229,900 $849,900
The cost of maintenance for 3
The cost of car years after the purchase is The cost is not too much for the type of
THE COST OF CAR
maintenance is nothing, however, at the end of engine, however, the gearbox is what could
MAINTENANCE
intermediate. these 3 years the cost of cost a little more, but still the cost is still low.
maintenance is intermediate.
DURATION OF
4,2 l/100 km. 14l/ 100 km. 7,5 l/100 km.
GASOLINE

It is only for 2 people, It is only for 4 people, with an It is only for 4 - 5 people, with an accessible
SPACE
with an accessible trunk. accessible trunk. trunk.

Motor 2.0 TDI. It has one of the engines with the best
Configuration / Cylinders / Valves
Accelerating from 0 to power-to-power ratio. With just 2.0 liters and
per cylinder 8/4, Maximum power
MOTOR 100 km / h in 7.2 seconds a turbocharger, it has a power of 360
in kW (hp) / rpm 412 (560) / 6,000-
and reaching 235 km / h horsepower and 450 Nm of torque ... 180
7,000.
of tip. horses per liter!
 EXAMPLES
CATEGORIA AUDI TT BMW M6 MERCEDES BENZ AMG

Rounded lines of its Its sporty design, the extremely The design is sporty, the seats are fabric, with
silhouette, futuristic low front skirt and generous air red stitching that protrude from these, has
design, have LED or intakes take advantage of the very fine details like polished aluminum
Matrix LED laws of aerodynamics to optimize between the components of the car.
headlights, the the stability in driving and
interior is very sporty ventilation of the high
DESIGN with leather seats. performance engine. The interior
design is made to measure of the
driver, the materials are of high
quality and resistance and with a
sporty design.
 EXAMPLES

WHICH WOULD BE THE BEST

 EXAMPLES

WHICH WOULD BE THE BEST

EXAMPLES

Analyzing and comparing all the advantages and disadvantages, the

conclusion is that the MERCEDES BENZ AMG is better than the others, although

its cost is not as cheap as the Audi TT, it has a maintenance cost well below

the other two, The capacity for people in accessible, the cost by the gasoline

is not so expensive, the engine is surprising in all and the design has perfect

and comfortable finishes. And the main thing is that everything meets the

needs required.
BIBLIOGRAPHY
From the book: Economa, Decimosptima Edicin, de Samuelson Paul y
Nordhaus William, Mc Graw Hill-Interamericana, Pg. 653.
From the book: Economa, Tercera Edicin, de Mankiw Gregory, Mc Graw Hill-
Interamericana, 2002, Pg. 231.
From the book: Marketing, Dcima Edicin, De Kotler Philip, Armstrong Gary,
Cmara Dionicio y Cruz Ignacio, Prentice Hall, 2004, Pg. 370.
Motor pasin, consultado el da 8 de Marzo del 2014. De
http://www.motorpasion.com/audi/audi-muestra-el-interior-del-tt-2014-en-el-
ces-de-las-vegas
Audi, consultado el da 8 de Marzo del 2014. De
http://www.audi.com.mx/mx/brand/es2/Modelos/tt/TT_Coupe/informacion.ht
ml&container=page
Audi, consultado el da 8 de Marzo del 2014. De
http://www.audi.com.mx/mx/brand/es2/Modelos/tt/TT_Coupe/Catalogo_Digit
al.html#source=
BMW, consultado el da 8 de Marzo del 2014. De
http://www.bmw.com.mx/mx/es/newvehicles/mseries/m6coupe/2012/showroo
m/technical_data/index.html
Mercedes, consultado el da 8 de Marzo del 2014. De http://www.mercedes-
amg.com/
BIBLIOGRAPHY
Edward Hastings Chamberlin. (2017). In Encyclopdia Britannica. Retrieved
from http://0-
academic.eb.com.millenium.itesm.mx/levels/collegiate/article/Edward-
Hastings-Chamberlin/22315
Mankiw, Gregory, Essentials in Economics, Australia, Thomson/South Wester,
2007.