Monopolistic competition

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Monopolistic competition

• Imperfect competition

Essay due in!
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Syllabus aims

• Understand the characteristics of a
  monopolistically competitive market and be able
  to use these to explain the behaviour of firms in
  this market structure.
• Students should be able to carry out diagrammatic
  analysis of the market structure in both the
  short and long run.
• Students should understand the importance of
  advertising and differentiation for the model of
  monopolistic competition and be able to contrast
  this with other market structures.
• Students should be able to explain and evaluate
  the efficiency of monopolistic competition.

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Monopolistic competition

• Monopolistic competition is a market that shares
  some characteristics of monopoly and some of
  perfect competition.
• There are many firms producing similar, but not
  identical products.

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Examples of monopolistic competition

• Sandwich bars
• Local takeaway restaurants
• Coffee stores
• Pizza delivery
• Hairdressers
• Small-scale childrens nurseries
• Care homes
• Independent hotels
• Coach companies

There are many firms producing similar, but not
identical products.
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Overview of a monopolistic market
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Sandwich bars

• Panini, Baps, Baguettes, Wraps and Bagels!!!!
• The total sandwich market in the UK is worth
  approximately 3.2bn and is growing at 5.
• Over 30 million people have bought a sandwich on
  the go this year with the average person buying a
  sandwich once per week.
• 1.8 billion sandwiches are purchased outside the
  home each year
• Despite tough competition, sandwich and snack
  bars have forged ahead with volume growth of over
  12
• Source TNS 2008

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How can you differentiate a sandwich ?
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How can you differentiate a sandwich?

• Hot and cold sandwiches
• Different styles e.g. a bap, baguette, wraps
  and filled bagels
• Speciality breads such as focaccia and ciabatta
• Product range - including Organic ingredients
• Healthy options (e.g. non-mayo)
• Packaging and branding
• Quality of ingredients
• Different fillings
• Made to order in the store / off the shelf / home
  or work delivery of sandwiches
• Finest range / value sandwiches

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Sandwich market Qs

• How many buyers how many sellers are there in
  this market?
• What type of concentration ratio is there in this
  market?
• Whats the ease of entry / exit to this market?
• What type of knowledge do consumers have?
• To what extent is there product differentiation
  or product branding?
• Does the company have some control over the
  price? Are they price makers or takers?
• Are they capable of making short term profits?

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Key theory to know
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Key characteristics of Monopolistic Competition

• There are many producers and many consumers in a
  market - the concentration ratio is low they
  act independently.
• Consumers see that there are non-price
  differences among the competitors products i.e.
  there is product differentiation
• The barriers to entry and exit into and out of
  the market are low
• Producers have some control over price - they are
  price makers rather than price takers.
• The firms are short run profit maximisers.

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Key characteristics

• In detail.

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Product differentiation

• Firms produce differentiated products, although
  there are substitutes for each firms products.
• There is a downward sloping D curve and
  elastic!
• Each firm tries to build brand loyalty to create
  loyal customers.
• There tends to be heavy advertising

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Ease of entry exit

• There are no barriers to entry exit.
• The existence of short term abnormal profits give
  incentives for other companies to start up.
• The existence of short term losses give
  incentives for companies to close down!

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Low concentration ratios

• What is the concentration ratio of a monopoly?
• What is the concentration ratio of a duopoly?
• What is the concentration ratio of a oligopoly?
• What concentration ratio border line will there
  be for a monopolistic competitive market?

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Low concentration ratios

• What will a low concentration ratio mean for the
  market conduct?
• Is there any interdependence?
• Is there any chance of collusion?

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HOMEWORK Questions

• Think about a local area that you know well
• Choose one of the following business areas and
  complete the Qs opposite
• Takeaway restaurants
• Coffee stores
• Hairdressers
• Small-scale childrens nurseries
• Independent hotels
• Local Coach Companies

• How many buyers how many sellers are there in
  this market? Give examples.
• Approximately, what type of concentration ratio
  is there in this market?
• How easy do you think it is for someone to enter
  exit this market?
• What type of knowledge do consumers have?
• To what extent is there product differentiation
  or product branding? Give examples.
• Do the companies have some control over the
  price? Are they price makers or takers? Give
  examples.
• Is there evidence that they capable of making
  short term profits?

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Next lesson

• Diagrams
• the importance of advertising and differentiation
• To explain and evaluate the efficiency of
  monopolistic competition.

• Next Thursday start of revision
• Will begin with reviewing PC, Monopoly
  evaluating the key differences
• Then look at some exam paper skills MC DR

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