ECON 305 Lecture Notes - Lecture 8: Monopolistic Competition, Price Discrimination, Demand Curve
11 Dec 2014
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High fixed cost lead to too little variety/brands. C= f + vq ac = f/q + v = f/q + mc. High fixed costs make the ac curve go upward so the firm is incurring losses when producing a good that is socially desirable to produce. The firm will not produce it, even if p>mc because first this margin does not cover all the fc and second, the firm incurs all of the social cost without getting any benefit. The good is not produced unless there is a subsidy (s) or some other means of increasing revenue such as two part pricing or price discrimination. Whether or not products are differentiated in monopolistic competition, the number of brands and the equilibrium prices are not always the social optimum. The introduction of new brands ignores the effects of increased competition on the profits of other firms.
