ECON1010 Lecture Notes - Lecture 11: Trivago, Perfect Competition, Best Western
All diagrams come from Patricia Ramirez de la Vina’s “Monopolistic Competition, Oligopoly, and Game Theory” PowerPoint
Notes
Lecture 11 Notes - Monopolistic Competition, Oligopoly, Game Theory
Properties of a Monopolistic Competition
● Many firms
● Similar but not identical products
○ Product Differentiation: the product each firm produces is somewhat
different from its competitors
■ Taste- Coke and Pepsi
■ Brand- Lululemon, Mercedes-Benz, Prada
■ Advertisement- Trivago, Best Western, Holiday Inn
■ Distance- Gas stations situated close to freeways
● Free entry and exit or market
● Imperfect Competition
●
● Profit-maximizes where Marginal Revenue = Marginal Cost (MR = MC)
● If Price > Average total cost, the firm is making a profit
○ If Price < average total cost, the firm is making a lost
Monopolistic-Competition vs. Monopoly vs. Perfectly Competitive Market
● Similar behavior to a monopoly in the short-run
● Closer to a perfectly competitive market in the long-run because economic profit = 0
○ If there is a profit in the short run, new firms enter market, prices and profits
fall
○ If there is a loss in the short-run, firms exit the market, increasing demand
and prices
●
● Produces at Q, where MC = MR and charges price of P = ATC
● In a perfectly competitive market, the price is where MC = ATC
Differs in that a perfectly competitive firm charges a lower price and produces a
greater quantity than a monopolistic competition firm
find more resources at oneclass.com
find more resources at oneclass.com
● Monopolistic competition firms have a markup and an excess capacity
●
Advertising
● Critics of advertising believe:
○ Society is wasting the resources it devotes to advertising
○ Firs adertise to aipulate people’s taste
○ Advertising impedes competition
● Supporters of advertising believe:
○ It provides useful information to buyers
○ Informed buyers can more easily find and exploit price differences
○ Advertising promotes competition and reduces market power
○ Fir’s illig to sped a lot on advertising shows that they have have a
quality product
Brand Names
● Consumers believe brand name products are superior to generic ones
○ Firms with brand names spend more on advertising and charge higher prices
for their products
○ Unclear whether it is beneficial or not to consumer
Oligopoly
● Imperfect Competition
● Few sellers with similar or identical products
● No free entry or exit
● Profits depend on how much each individual firm produces and on how much other
firms produce
● Concentration Ratio: peretage of the arket’s total output supplied its four
largest firms
○ The larger the percent, the more dominated the market is
○ Exampes: Video Game Consoles-100%, Tennis balls-100%, Soft drinks- 68%
● Duopoly: oligopoly with only two producers
find more resources at oneclass.com
find more resources at oneclass.com
Document Summary
All diagrams come from patricia ramirez de la vina"s monopolistic competition, oligopoly, and game theory powerpoint. Lecture 11 notes - monopolistic competition, oligopoly, game theory. Product differentiation: the product each firm produces is somewhat different from its competitors. Distance- gas stations situated close to freeways. Profit-maximizes where marginal revenue = marginal cost (mr = mc) If price > average total cost, the firm is making a profit. If price < average total cost, the firm is making a lost. Similar behavior to a monopoly in the short-run. Closer to a perfectly competitive market in the long-run because economic profit = 0. If there is a profit in the short run, new firms enter market, prices and profits fall. If there is a loss in the short-run, firms exit the market, increasing demand and prices. Produces at q, where mc = mr and charges price of p = atc. In a perfectly competitive market, the price is where mc = atc.
