Flashcards
Chapter 16: Monopolistic competition
Cards in this deck (10)
- 1Monopolistic competitionMarket structure in which many firms sell products that are similar but not identical e.g. restaurants, retail clothing market, novels
- 2Properties of monopolistic competition1. Many firms (like competition)
2. No barriers to entry and exit, so LR profits are zero (like competition)
3. Product differentiation - similar but not identical good, so downward-sloping firm demand and some market power (like monopoly) - 3Monopolistic competition in the SREquivalent to monopoly:
- Downward-sloping firm demand curve i.e. P > MR
- Profit maximised when MR = MC
- Hence P > MC - 4Monopolistic competition in the LR- Still MR = MC
- Free entry and exit leads to zero profit equilibrium like perfect competition i.e. P = AC > MC
- Demand curve and ATC are tangent to each other at the same quantity where MR = MC - 5Allocative efficiency of monopolistic competition- P > MC, so not allocatively efficient
- Difficult to regulate lower price to fix this, as firms are making zero profits in LR - 6Technical efficiency of monopolistic competition- P > min ATC, so not technically efficient
- There is excess capacity i.e. can produce more at lower per-unit cost, but not profitable do so
- However, consumers benefit from being able to choose from a variety of goods (product diversity) - 7Externalities associated with entryCan be inefficient as number of firms in the market may be not be ideal
- Product-variety externality - consumers get surplus from introduction of a new product, so entry of a new firm conveys a positive externality on consumers
- Business-stealing externality - firms lose customers and profits when faced with a new competitor, so entry of a new firm imposes a negative externality on existing firms - 8Monopolistic competition and advertising- Successful product differentiation is key
- Advertising can create brand awareness and brand loyalty, which facilitate successful differentiation
- Willingness to spend money on advertising can be construed as a signal of quality - 9Pros of advertising- Informs consumers, which can increase competition and improve product quality
- Allows consumers to take advantage of price differentials, so each firm has less market power
- Allows new firms to enter more easily, as it gives them a means of attracting customers from existing firms
- Establishes brand names of reliable quality - 10Cons of advertising- Takes advantage of consumer irrationality and softens competition
- Manipulates people’s tastes i.e. psychological rather than informational
- Impedes competition by convincing consumers that products are more different than they actually are
- Can promote irrational brand loyalty
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- Business/Economics (ECC1000: Principles of Microeconomics) Flashcards on Chapter 16: Monopolistic competition, created by Melina Mackey on 29/05/2018.
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- Melina Mackey
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