Monopolistic Competition

Monopolistic Competition (m.c.)

large number of independent sellers no or low barriers to entry differentiated product

differentiated products

products that are distinguished from similar products by such characteristics as quality, design, and location.

examples: service stations, aspirin, tissues, retail stores

Demand Curve for the Monopolistic Competitor’s Product

Since the product is differentiated, there is some brand loyalty and the firm has some control over price.

Since there are good substitutes available, however, the demand curve is fairly elastic.

The demand curve for the monopolistic competitor’s product is flatter than the demand curve for the monopolist’s product, but not horizontal like the demand curve for the perfect competitor’s product.

p.c. m.c. monopoly

DD D

P P P

Q Q Q

Apart from the fact that the demand curve for the monopolistic competitor’s product is technically flatter than the demand curve for the monopolist’s product, the graphs look essentially the same.

Monopolistic Competitor making positive economic profits

Profit-maximizing output: where MR = MC

ATCMC

MR D

$

quantityQ*

Determine the price from the demand curve, above Q*.

ATCMC

MR D

quantity

$

Q*

P*

Determine the cost per unit from the ATC curve, above Q*.

ATCMC

MR D

quantity

$

Q*

P* ATC*

Determine the TR = PQ box.

ATCMC

MR D

quantity

$

Q*

P* ATC*

Determine the TC = ATC . Q box.

ATCMC

MR D

quantity

$

Q*

P* ATC*

The difference between TR and TC is profit.

ATCMC

MR D

quantity

$

Q*

P* ATC*

profit

Monopolistic Competitor with a loss

Profit-maximizing or loss-minimizing output: where MR = MC

ATCMC

MR D

$

quantityQ*

AVC

Determine the price from the demand curve, above Q*

ATCMC

MR D

$

quantityQ*

P*AVC

Determine the cost per unit from the ATC curve, above Q*

ATCMC

MR D

$

quantityQ*

ATC* P*

AVC

Determine the TC = ATC . Q box

ATCMC

MR D

$

quantityQ*

ATC* P*

AVC

Determine the TR = PQ box.

ATCMC

MR D

$

quantityQ*

ATC* P*

AVC

The difference between TR and TC is profit or loss.

ATCMC

MR D

$

quantityQ*

ATC* P*

lossAVC

Monopolistic Competitor Breaking Even (Zero Economic Profit)

Profit-maximizing output: where MR = MC (directly below the tangency of D and ATC)

ATCMC

MR D

$

quantityQ*

Determine the price from the demand curve, above Q*

ATCMC

MR D

$

quantityQ*

P*

Determine the cost per unit from the ATC curve, above Q*

ATCMC

MR D

$

quantityQ*

ATC* = P*

Determine the TR = PQ box.

ATCMC

MR D

$

quantityQ*

ATC* = P*

Determine the TC = ATC . Q box.

ATCMC

MR D

$

quantityQ*

ATC* = P*

Since TR = TC, profit is zero.

ATCMC

MR D

$

quantityQ*

ATC* = P*

Possibilities for the Monopolistic Competitor

short run: positive profits, losses, or breaking even.

long run: breaking even.

Similarities between perfect competition and monopolistic competition

Profits must be zero in long run equilibrium. Firms are responsive to changes in demand

conditions. Competition in the pursuit of profit encourages

resource movements that are efficient.

Differences between perfect competition and monopolistic competition

In long run equilibrium, the perfectly competitive firm is at the minimum of the ATC curve. The monopolistically competitive firm is not.

For perfectly competitive firms, P = MC. For monopolistically competitive firms, P > MC.

Perfectly competitive firms don’t advertise because everyone knows the products are all the same. Monopolistic competitors advertise to convince consumers that their product is better than others.

Price Discrimination

when a seller charges different prices to different consumers for the same product or service.

Examples

Charging different prices for movie admission to students and senior citizens and to other customers is price discrimination.

Charging different prices for movie admission on a Wednesday afternoon and on a Saturday night is not price discrimination because the products are not the same.

Requirements for Price Discrimination to Occur

Firm must have some control over price. (So perfect competitors can not price discriminate, but monopolistic competitors, monopolists, and oligopolists can.)

Firm must be able to separate consumers into different identifiable groups.

The different groups must have different elasticities.

The price discriminating firm charges the group with the higher elasticity a lower price.