Chapter 17

Monopolistic Competition

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 The Spectrum of Market Structure

Pure Pure
Competition Monopoly

PC MC M
O

Monopolistic Oligopoly
Competition

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 Imperfect Competition
Two imperfectly competitive markets:
 Monopolistic Competition

 Oligopoly
Few interdependent sellers, offering a similar or
identical products

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 Monopolistic Competition
 Mostly features of competition and a
few monopoly.
 Attributes:
 Many Sellers
Free Entry/Exit
Product Differentiation

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 Monopolistic Competitor’s Demand
Price Note: NOT Market Demand
Slopes Downward due to
Product differentiation
P2 B

P1 A

Demand

Quantity
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Q2 . Q1 .
 Now Adding MR Curve
Price

P2 B

P1 A

Demand

MR

Quantity
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Q2 . Q1 .
 Attribute: Many Sellers

 Examples:
– restaurants, taverns,
piano lessons,
barbers, beauty shops
etc.

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 Attribute: Product Differentiation
 Different Products
– quality
– services/clientele
– location
– packaging/advertisement.

 Demand highly, but not perfectly,

elastic.
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 Attribute: Free Entry or Exit
Easy entry
No long-run profits

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 Monopolistic Competition in Short Run

 In short-run, monopolistically
competitive firm:
– Uses general rule for profit-maximization.
 MR = MC Gives Output Level
 Price > ATC Earn Profits
 Price < ATC Minimize Losses

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 Monopolistically Competitors in the
Short-Run
Price
MC
ATC

ATC
Demand

MR
Quantity
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Q Profit Max.
 Monopolistically Competitors in the
Short-Run: Positive Profit
Price
MC
ATC

P>ATC
P
Firm Makes
ATC Profit
Demand

MR
Quantity
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Q Profit Max.
 Monopolistically Competitors in the
Short-Run: Zero Profit
Price
MC
ATC

ATC= P

Demand

MR
Quantity
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Q Profit Max.
 Monopolistically Competitors in the
Short-Run
Price
MC
ATC

ATC
P

Demand
MR
Quantity
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Q Loss Min.
 Monopolistically Competitors in the
Short-Run
Price
MC
ATC

ATC
P P<ATC
Firm Makes
Losses

Demand
MR
Quantity
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Q Loss Min.
 Long-Run Operation in
Monopolistic Competition

 If economic profit in short-run, new

firms enter the market.

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 Monopolistic Competition in Long Run
 Firms enter or exit until zero economic
profits.
 Two long-run characteristics
P > MC …deadweight loss
 P = ATC …zero profits

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 A Monopolistic Competitor
in Long-Run
Price
MC
P ATC

MR
Quantity
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Q Profit Max.
 A Monopolistic Competitor
in the Long-Run
Price
MC
P ATC

MR
Quantity
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Q Profit Max.
 A Monopolistic Competitor
in the Long-Run
Price
MC
ATC
P=ATC

MR
Quantity
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Q Profit Max.
 Monopolistic Competition:
Excess Capacity

 In perfect competition, firms produce

at efficient scale ---lowest point on
ATC curve

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 The Competitive Firm’s Output in the
Long-Run
Price
MC
ATC

P=MC P=MR=AR

Quantity
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QEfficient Scale
 Monopolistic Competition:
Excess Capacity
 In monopolistic competition, quantity
of output is less than “efficient scale”
Roar

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Monopolistically Competitive Output in
the Long-Run
Price
MC
ATC

MC
Demand

MR
Quantity
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QProduced
Monopolistically Efficient Output in the
Long-Run
Price
MC
ATC

MC
Demand

MR
Quantity
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Q Q Efficient Scale
Monopolistically Efficient Output in the
Long-Run
Price
MC
ATC

P
Excess
MC
Capacity
Demand

MR
Quantity
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Q Q Efficient Scale
Monopolistically Competitive Output in
the Long-Run
Price
MC
ATC

P
Mark-Up
MC
Demand

MR
Quantity
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Q Q Efficient Scale
 Monopolistic Competition and the
Welfare of Society
Inefficiencies include:
 The markup price over marginal cost

– Results in “deadweight loss” to society.

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 Monopolistic Competition and the
Welfare of Society

 Number of firms in market not “ideal”.

Say it isn’t so!

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 Monopolistic Competition: Advertising
and Brand Names
 Product differentiation leads to
advertising and brand names.

 Advertising and brand names: exploit

consumers?

 Advertising: increases competition by

offering variety of products?
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 Monopolistic Competition: Advertising
 Firms that sell differentiated goods
spend between 10 to 20% of revenue
for advertising.

 Total economy spends about 2% of

TR, or over $100 billion a year, on
advertising.

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 Monopolistic Competition: Advertising
and Brand Names
 Brand Names benefit consumers:

 Provide information about quality

 Give firms an incentive to maintain

high quality.

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 Wrap-Up Time

Didn’t feel like a fish outta

wadah taday!

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