Microeconomics Monopolistic Competition

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Chapter 15 Monopolistic Competition
MONOPOLISTIC COMPETITION * market structure characterized by many sellers of differentiated products with free entry and exit * differentiated products --> market power * many sellers --> no collusion * free entry and exit --> zero economic profit in the long-run
SHORT-RUN --JUST LIKE MONOPOLY * market power --> downward-sloping demand * downward-sloping demand --> marginal revenue less than price * produce the quantity such that MR = MC * charge highest price possible for that Q as shown by demand

LONG-RUN--JUST LIKE PERFECT COMPETITION * short-run profit --> entry * entry --> decrease in demand for existing firms until zero profit * short-run loss --> exit * exit --> increase in demand for remaining firms until zero profit

LONG RUN--EXCESS CAPACITY * monopolistically competitive firms charge P> MC * zero profit --> P = ATC * P > MC & P = ATC --> ATC > MC * ATC > MC --> ATC is not minimized * higher cost (& therefore price) is the price we pay for product variety

MOTIVATION * goal: to develop a position (market niche) * effect: gain market power * reason: other products less likely to be seen as viable substitutes * result: command higher price
VALUE IN DIVERSITY VS. COMPETITION AMONG SELLERS * product differentiation involves a trade-off * value in diversity: more products --> consumers more able to find the perfect match * competition among sellers: more products are competing for the same consumers
DICHOTOMY
* consider a set of equally priced products * horizontal differentiation: consumers would rank products differently * examples: books, movies, music, restaurants, vehicles * vertical differentiation: consumers would rank products…...

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