monopolistic competition
characterized by 1) a relatively large number of sellers, 2) differentiated products (often promoted by heavy ads), 3) easy entry to and exit from the industry
> In monopolistic competition, firms can differentiate their products by the product attributes
advertising
If a firm goes to the trouble and expense of differentiating their product they should let people know about it. They can do this through advertising.
monopolistically competitive
Industry concentration
Measured by:
Four-firm concentration ratios
Percentage of 4 largest firms
Herfindahl index
Sum of squared market shares
four-firm concentration ratios
expressed at a percentage; is the ratio of the output (sales) of the 4 largest firms in an indsutry relative to total industry sales
a measure of industry concentration; are low in monopolistically competitive firms as in the table on the next slide. One
hefindahl index
the lower the HI, the more competitive the industry. The Herfindahl Index is another measure of industry concentration and it is the sum of the squared percentage of market shares of all firms in the industry. Generally speaking, the lower the Herfindahl,
small market shares
each firm has a comparatively small percentage of the total market and consequently has limited control over market price
no collusion
the presence of a relatively large number of firms ensures that collusion by a group of firms to restric output and set prices is unlikely
independent action
with numerous firms in an industry, there is no feeling of interdependence among them; each firm can determine its own pricing policy without considering the possible reactions of rival firms
product differentiation
in contrast to pure competition, in which there is a standardized product, monopolistic competition is distinguished by this
product attributes
product differentiation may entail physical or qualitative differences in the products themselves; real differences in functional features, materials, designs, and workmanship are vital aspects of product differentiation
service
service and the conditions surrounding the sale of a product are forms of product differentiation too. one shoe store may stress the fashion knowledge and helpfulness of its clerks
location
products may also be differentiated through the location and accessibility of the stores that sell them
brand names and packaging
product differentiation may also be created through the use of brand names and trademarks, packaging, and celeb connection
some control voer price
despite the relatively large number of firms, monopolistic competitors do have some control over their product prices because of product differentiation
easy entry and exit
because monopolistic competitors are typically small firms, both absolutely and relatively, economies of scale are few ad capital requirements are low
nonprice competition
to make price less of a factor in consumer purchases and make product differences a greater factor; if successful, the firm's demand curve will shift to the right and will become less elastic
low concentration industries chart
This table shows some examples of U.S. manufacturing industries that are considered monopolistically competitive. The lower the 4-firm concentration ratio, the less concentration and subsequently, the more competitive the industry. Generally speaking, the
the firm's demand curve
The firm's demand curve is highly, but not perfectly, elastic. It is more elastic than the monopoly's demand curve because the seller has many rivals producing close substitutes. It is less elastic than in pure competition because the seller's product is
the short run: profit or loss
In the short run situation, the firm will maximize profits or minimize losses by producing where marginal cost and marginal revenue are equal, as was true in pure competition and monopoly. (produce where MC=MR)
The profit maximizing situation is illustrat
the long run: only a normal profit
Much like in pure competition, in monopolistic competition the profits in the long run are equal to zero because of free entry and exit into and out of the industry. As we examine the industry, we will find that it is inefficient.
In the long run firms st
productive efficiency
Productive Efficiency means that the firm is producing in the least costly way and is evidenced when P = min ATC.
allocative efficiency
Allocative Efficiency means that the firm is producing the right amount of output and is evidenced when P = MC.
productive INefficiency
P > ATC
allocative INefficiency
P > MC
benefits of product variety
Monopolistically competitive producers may be able to postpone the long-run outcome of just normal profits through product development, improvement, and advertising.
further complexity
Compared with pure competition, this suggests possible advantages for the consumer. Development, or improved products, can provide the consumer with a diversity of choices. Product differentiation is at the heart of the trade-off between consumer choice a