Monopolistic Competition


A market structure in which many firms sell products that are similar, but not identical. Therefore, a lot of sellers with slight product differentiation and they are allowed to enter freely to the markets.

Monopolistic competition is between extreme competition and monopoly. As a result, it has characteristics of both types of markets just like oligopoly. However, different in that it has many sellers.

Monopolistically Competitive Firm in the Short-run


- It follows the monopolistic characteristics; therefore, when MR=MC, the profit is maximized
- It also determines its quantity and price like monopolies do, so that..
Price > Average Total Cost, since it's profit
Price < Average Total Cost in the other hand is loss
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Monopolistically Competitive Firm in the Long-run


- It is similar to the perfectly competitive firms; therefore, due to free entry, when firms make profit, more firms enter. Since more profit gained increases entry, the entry of more firms shift the demand curves to the left. The reason is because demand in for the previously existing firms decline as more firms enter with similar goods. Therefore, the profit for the original firms decrease.
-However, when the firms are making losses firms exit. Because loss causes exit of the firms, the demand curve shifts to the right. Therefore, the demand for previous firm products rise since there are less firms now in the market. As a result, the firms who remain gain more profit.
*NONETHELESS, through free entry and exit, the profit ends up as ZERO. The process of free entry and exit will continue until profit reaches zero, which is the equilibrium. Therefore, at equilibrium, the firms have no incentives to enter or exit. As a result, ATC and Demand curve end up being tangent.

Monopolistic vs. Perfect Competition


Excess Capacity
efficient scale: minimum amount of quantity in ATC
excess capacity: firms under monopolistic competition
monopolistically competitive firm can increase the amount of goods produced and decrease ATC of the production.
Markup over Marginal Cost
-relationship between price and marginal cost
-when firms have zero profit, price equals ATC, but price does not equal MC.
-In long run, ATC curve declines, therefore MC is below ATC.
-Price = ARC, Price above MC

Monopolistic Competition and the Welfare of Society

-inefficiency: price / marginal cost
-policymakers have to control every single firm who produce difference goods in order to implement marginal-cost pricing.
-when monopolistic competitors have zero profit, if the regulators entail them to lower the prices in order to be equal with marginal cost; this would only create losses
The product variety externality: new firms who freshly entered the market express positive externality on consumers because they het consumer surplus from new goods
The business-stealing externality: new firms who freshly entered the market expresses negative externalities on firms which previously existed because other firms will lose their customers and their original profit.


Cocacola-EL-Advertisement-Signboard-22412285613.jpg


The Debate over Advertising

Critique of Advertisement
-firms advertise in order to control what people want
-it is psychological when it should be informational
-create fake desires that people didn’t have before
-increase the idea of product differentiation which obstructs competition
Defense of Advertising
-provide information such as price, existence, location, and more. This lets customers to have variety of choices in decision making process
-there is more advancement in competition because customers know more about the product of all firms.
-easily entered new firms because advertising lures original firm.


Brand Names

-related to advertising
-Two types of firms: firms that are widely known, and other forms who are simply substitutes.
-more brand name, more price per good
-there is debate over brand names
-critique: it causes unnecessary imagery
-irrational!
-the advertisements of the products with brand names provide information for the consumers about its quality.

summary



Questions
1. When MR=MC, _
2. What is product variety externality?
3. What is business stealing externality?
4. How does advertising help customers?
5. On Monopolistic competitor in short run, MC crosses ATC at _ point

Answers
1. profit maximize
2. new firms who freshly entered the market express positive externality on consumers because they het consumer surplus from new goods
3. new firms who freshly entered the market expresses negative externalities on firms which previously existed because other firms will lose their customers and their original profit.
4. Advertising provide information for customers about the product
5. its minimum

picture source
http://www.chinawholesalegift.com/pic/Coca-Cola-Promotional-Gifts/Cocacola-EL-Advertisement-Signboard-22412285613.jpg