Monopolistic Competition

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Monopolistic Competition
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Market Structures - Review

• Competitive many firms, identical products
• Monopoly single firm, no close substitutes
• Oligopoly several firms, similar products,
  degree of product differentiation varies
  depending upon the market
• Monopolistic competition many firms, similar
  products, slightly differentiated products

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Competitive Market

• This is the classic textbook market structure.
• Firms in a competitive market all make a product
  that is perfectly substitutable all demanders
  are equally satisfied with any suppliers
  product. Firms are price takers.
• Hot dogs!

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Monopoly

• The single seller makes a product that has no
  good substitute.
• Other firms may be able to produce the good or
  service but choose not to enter the market or are
  barred from it. Firms are price makers.
• Some pharmaceuticals

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Oligopoly

• A few sellers make products that are good, but
  not perfect, substitutes.
• Consumers can be induced to change suppliers but
  have only a limited number of choices.

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Monopolistic Competition

• The market has many firms but each suppliers
  product is differentiated.
• Consumers can be induced to change brands but
  they have brand preferences.

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Question

• What is the appropriate market structure model
  for each of these products or firms competitive,
  monopoly, oligopoly, monopolistic competition?
• The Campus Store
• Kinkos
• Pepperidge Farms Whole Wheat Bread
• PowerMac computer
• Windows computer
• Viagra
• Morton salt
• ATT long distance

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Answers

• The Campus Store most products competitive,
  textbooks oligopoly
• Kinkos monopolistic competition (differentiated
  service)
• Pepperidge Farms Whole Wheat Bread competition
  or monopolistic competition (slightly
  differentiated recipes)
• PowerMac computer and clones monopoly, under
  license.
• Windows computer monopolistic competition
  (differentiated features)
• Viagra monopoly
• Morton salt competitive
• ATT long distance oligopoly

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Monopolistic Competition

• Structure
• Several firms in the market.
• Producing differentiated products.
• Free entry and exit.
• Full and symmetric information.
• 1st and 3rd smack of perfect competition.
• 2nd adds a monopoly ingredient.

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On Differentiation

• Could be
• actual taste, color, location, service, etc.
• perceived L.e.i. jeans vs. Wranglers!
• Advertising often plays a big role in
  monopolistically competitive markets

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An Historical Note

• Intellectual parents
• Joan Robinson (economist at Cambridge in the
  U.K.)
• Edward Chamberlin (economist at Harvard in
  Cambridge, MA)
• Both pioneered the work on monopolistic
  competition in the early 1930s.

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Monopolistic Competition - Short Run Conduct

• The monopolistically competitive firm looks and
  acts just like a mini-monopolist.
• Example Gloria Vanderbilt Jeans

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Monopolistic Competition - Long Run Conduct

• Free entry will force firm long run economic
  profits to zero.
• So 1) profit max2) zero profit and3) a
  downward sloping firm demand and corresponding
  marginal revenue.
• Firm demand will be tangent to its long run
  average total cost curve.

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Why tangent?

• Firms profit maximize but free entry will force
  firm long run economic profits to zero.
• 1) profit max implies that mrmc at xmc
• 2) zero profit implies that Plratc at xmc
• 3) product differentiation implies a downward
  sloping firm demand and corresponding marginal
  revenue
• Firm demand must be tangent to the long run
  average total cost curve - which must occur to
  the left of the lratc curves minimum point.

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Monopolistic Competition- Performance

• Efficiency
• Is the monopolistically competitive firm Pareto
  Efficient? That is, at xMC is net social surplus
  maximized? Does MBMC at xMC?
• answer No.
• Is the monopolistically competitive firm
  productively efficient? Does the firm operate at
  minimum efficient scale?
• answer NO! There is excess capacity.
• Is this excess capacity bad?
• Isnt variety really the spice of life?
• Dont forget theres always equity to consider,
  too.