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Chapter 14 - Monopolistic Competition.docx

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ECON 101
Corey Van De Waal

Chapter 14 Monopolistic Competition What is monopolistic competition Monopolistic competition is a market structure whereThere a lot of competing firmsEach firm makes a differentiated productFirms compete on a product quality price and marketingFirms are free to enter and leave the industry Large number of firms When there are a lot of competing firmsEach firm has a small market share therefore limited market power to influence its products priceEach firm is sensitive to the average market price but they do not pay attention to the actions of others Therefore no one directly affect the actions of othersConspiring to fix prices or collusion is impossible Perfect Differentiation Perfect differentiation happens when a firm makes a product that is slightly different from the products of competing firms Competing on quality price and marketing Product differentiation allows firms to compete in 3 areas quality price and marketingQualitydesign reliability and serviceDemand for each individual product by firm is downward slopingcreates a tradeoff between price and qualityA firm must market its productmarketing is in two forms advertising and packaging Entry and Exit There are no barriers to entry so firms cannot make an economic profit in the long run Examples of monopolistic competition include producers of audiovideo equipment clothing jewelry computers and sporting goods Price and output in monopolistic competition The firms shortrun output and price decision A firm produces the profitmaximizing quantity when it decides the quality of its product and marketing program quantity where MRMC Price is determined by demand and the highest price the firm can charge for the profitmaximizing quantity Firms in monopolistic competition operate like a singleprice monopolyProduces quantity where MRMC and sells it for the highest possible price o Makes an economic profit ie PATCimage on the left
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