Chp 13: Monopolistic Competition and Oliopoly

Resembles both competition and monpoly;
1. as with competition, entry into and exit from are unrestricted resulting in a large number of independent sellers
2. firms do not produce homogeneous product; instead their products are heterogeneous or differentiated; consumer perceive differences; products may be differentiated by physical feature, function, design, logo, advertising, conditions related to sale, location, service,availability

First step is understand demand curve
*When firm sells a differentiated product with close substitutes it has some degree of monopoly power
Demand curve confronting firm is downward sloping- degree of monopoly power is slight because of availability of close substitutes--> demand curve downward sloping but fairly elastic

Attracted by prospect of profits, new firms enter; as entry continues demand curve for existing firms shifts downward until zerp-profit long run equilibrium is attained

Marginal Revenue = Marginal Cost

1. Tight jeans is only one among a number of firms producing a similar product and so demand curve is not market demand curve for demands *it is only the demand curve for jeans produced by one firm
2. under monopolistic competition entry into the market is unrestricted- when firms make profit others are attracted- *equilibrium cannot be long-run equilibrium because profits are being realized - could represent short run equilibrium but with entry of other firms, demand curve facing existing firm will shift

Entry continues until firms are no longer making economic profit; new firms will increase industry's total ouput, provide for wider variety of differentiated products
** both these effects shift existing firms' demand curve downward leading to reduction in industry's level of prices and thus lower profit

Only then will there be no further incentive for other firms to enter the market Firm

Range of differentiated products in a market is not fixed and firms often introduce new variations they believe will be profitable

1. As with perfect competition, each firm's demand curve is tangent to its long-run average cost curve so economic profit is zero
2. As with monopoly, demand curve is downward sloping so price exceeds marginal cost at equilibrium
*firm's demand curve is relatively elastic, price will normally not exceed MC by very much

1. fact the firm does not operate at the minimum point on its long-run Average cost curve
2. produces the wrong total output from social perspective

1. Every firm in monopolistically competitive industry is in a similar position
2. by contrast, firms in competitive industry operate at minimum points on long run AC curves
3. excess capacity- result of firms failing to produce at lowest possible average cost
*failure to operate at minimum Average Cost is potentially inefficient because its possible to produce same industry output at lower cost

1. Each firm is producing an output where price is greater than MC
2. Condition suggests that additional output is worth more to consumers than cost of producing it
*deadweight loss from producing too little

1. deadweight loss associated is likely to be small
2. any possible inefficiency cost must be weighed against product variety produced and benefits of that variety to consumer
3. and sort of intervention as it's own costs

Each firm's demand curve is realtively elastic so excess of price over MC is small

Probably desirable for firms to continue to have icnentive to introduce new differentiated products that better satisfy consumer tastes and that incentive could be undermined by regulation