Market Structures: Monopolistic Competition (Chapter 15)

Market Structures: Monopolistic Competition (Chapter 15)

1. Competition with Differeniated Products

   • Monopolistic Competition - a market structure in which many firms sell products that are similar but not identical
   • In the Short-Run, Monopolistic Competition and a Normal Monopoly are very similar, they choose their prices, and therefore have big profits
   • 2 Characteristics describing the Long-Run Equillibiium in Monopoly Competitive Markets:
     • 1. Like in a monopoly, PRICE > MARGINAL COST
     • 2. Like a competitive market, PRICE = TOTAL AVERAGE COST, because of free entry and exit
   • Monopoly vs Perfect Competition
     • Excess Capacity - where the amount produces is lower than an amount that is minimises total average cost (known as the efficient scale)
     • Mark-Up over Marginal Cost - the difference between the marginal cost and the price at which it is sold
   • 2 External Effects when a New Firm enters a Market
     • The Product-Variety Externality - consumers get consumer surplus when a new product enters, a new firm conveys a positive externality on existing firms
     • The Business-Stealing Externality - other firms lose customers and profit when a new competitor enters, a new firm imposes a negative externality on existing firms

2. Advertising and Branding

   • The Critique of Advertising - Critic's argue that firms advertise in order to manipulate people's tastes, making it more psychological , rather than informative
   • The Defence of Advertising - it is used to spread information to the customers
   • Branding - the means by which a business creates an identity for itself and highlights the way in which it differs from its rivals

3. Contestable Markets

   • Entry Limit Picking - a situation where a firm will keep prices lower than they could be in order to deter new entrants
   • Predatory or Destroyer Pricing - a situation where firms hold price below average cost for a period to try and force out competitors or prevent new firms form entering the market
   • Competitive Advantage - the advantages firms can gain over another which have the characteristics of being both distinctive and defensible
   • Cream-Skimming - a situation where a firm identifies parts of a market that are high in value added and seeks to exploit those markets

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