Post on 25-Dec-2015
Chapter 26
Monopolistic Competition
Slide 26-2
Introduction
A number of firms, including Hewlett-Packard, Wal-Mart, Microsoft, and Amazon all are trying
to earn profits from downloadable digital music files.
The theory of monopolistic competition explains the nature of the pricing decisions
they face.
Slide 26-3
Learning Objectives
Discuss the key characteristics of a monopolistically competitive industry
Contrast the output and pricing decisions of monopolistically competitive firms with those of perfectly competitive firms
Slide 26-4
Learning Objectives
Explain why brand names and advertising are important features of monopolistically competitive industries
Describe the fundamental properties of information products and evaluate how the prices of these products are determined under monopolistic competition
Slide 26-5
Chapter Outline
Monopolistic Competition
Short-Run and Long-Run Equilibrium in Monopolistic Competition
Comparing Perfect Competition with Monopolistic Competition
Brand Names and Advertising
Information Products and Monopolistic Competition
Slide 26-6
Did You Know That...
Nearly all of the quarter-million fast-food restaurants in the U. S. offer some type of salad item on the menu?
The advertising that promotes these salads helps each fast-food chain differentiate its products from those of its competitors?
Slide 26-7
Monopolistic Competition
Monopolistic Competition
– A market situation in which a large number of firms produce similar but not identical products
– Entry into the industry is relatively easy
Slide 26-8
Monopolistic Competition
Characteristics of monopolistic competition
– Significant number of sellers in a highly competitive market
– Differentiated products
– Sales promotion and advertising
– Easy entry of new firms in the long run
Slide 26-9
Monopolistic Competition
Implications of the large number of firms
– Small market share
– Lack of collusion
– Independence
Slide 26-10
Monopolistic Competition
Product Differentiation
– The distinguishing of products by brand name, color, and other minor attributes
Slide 26-11
Monopolistic Competition
Product differentiation and price
– Differentiate perfectly• Producer is a monopoly
– Significant influence on price
– Differentiation is not perfect • Producer is a monopolistic competitor
– The more successful it is at differentiation, the more control it has over price
Slide 26-12
Example:Product Differentiation in Toothpaste
How do toothpaste manufacturers differentiate their particular product from other brands?
By flavor, whitening effects, and type of packaging.
Slide 26-13
Monopolistic Competition
Sales promotion and advertising
– Can increase demand for a firm
– Can differentiate a firm’s product
– Should be continued to the point at which the additional revenue from one more dollar of advertising just equals that one dollar of marginal cost
Slide 26-14
Monopolistic Competition
What do you think?
– Would a perfect competitor have any incentive to advertise?
– Why would a monopolistically competitive firm advertise?
– Can advertising lead to efficiency?
Slide 26-15
Short-Run and Long-RunEquilibrium with Monopolistic Competition
Figure 26-1, Panel (a)
• Price (P1) > ATC• Economic profit
Panel (a)
Quantity
q
P1ATC
d
MC
MR
Profits
ATC
A
Dol
lars
per
Uni
t
Slide 26-16
Short-Run and Long-RunEquilibrium with Monopolistic Competition
Figure 26-1, Panel (b)
-Price (P1) < ATC-Economic loss
Panel (b)
Quantity
q
ATC
P1d
MC
MR
Losses
ATC
ADol
lars
per
Uni
t
Slide 26-17Figure 26-1, Panel (c)
Short-Run and Long-RunEquilibrium with Monopolistic Competition
-Price (P1) = ATC-Normal rate of return
Panel (c)
Quantity
ATC
q
P1 =
d
MC ATC
MR
A
T
Dol
lars
per
Uni
t
Slide 26-18
Perfect competitors and monopolistic competitors earn zero economic profit.
How are they different?
Comparing Perfect Competitionwith Monopolistic Competition
Slide 26-19
Comparison of the Perfect Competitorwith the Monopolistic Competitor
Figure 26-2, Panels (a) and (b)
d
q2
P2
ATC
Panel (b)Monopolistic Competition
Quantity per Time Period
Minimum ATC
MC
MR
q 1
ATC
Panel (a)Perfect Competition
Quantity per Time Period
Minimum ATC
MC
dP1 MR = P
Dol
lars
per
Uni
t
Dol
lars
per
Uni
t
Slide 26-20
In perfect competition, the long-run equilibrium occurs where average total cost is minimized.
This does not occur in monopolistic competition.
Some have argued that this is not necessarily a waste of resources, as the added cost arises from product differentiation that allows consumers to have more choice.
Comparing Perfect Competitionwith Monopolistic Competition
Slide 26-21
Brand Names
Firms use trademarks, words, symbols, and logos to distinguish their product brands from goods or services sold by other firms
A successful brand image contributes to a firm’s profitability
Slide 26-22
Advertising
Forms of advertising
– Direct marketing
– Mass marketing
– Interactive marketing
Slide 26-23
Advertising
Search goods have characteristics that can be evaluated prior to purchase
Experience goods, such as movies and haircuts, don’t fully reveal their value until they have been consumed
Advertising for experience goods is more likely to be persuasive rather than informational
Slide 26-24
Information Products and Monopolistic Competition
Information products, such as computer operating systems, software, and digital music and videos, have a unique cost structure
Product development entails high fixed costs, but the marginal cost of producing a copy for one more customer is low
Slide 26-25
E-Commerce Example:Pop-Up Ads
There have been court cases involving the use of pop-up ads to promote competing products when internet customers place online orders.
The legal rulings have been moving in the direction of allowing more interactive advertising.
Slide 26-26
Cost Curves for Information Products
Figure 26-4
Slide 26-27
Cost Curves for Information Products
Sellers of information products experience short-run economies of scale.
The average total cost continually declines as quantity increases.
Slide 26-28
Monopolistic Competition and Information Products
Computer game manufacturers operate in a monopolistically competitive market.
In monopolistic competition, marginal cost pricing results in losses for the firm, even though it creates efficiencies for the economy as a whole.
Slide 26-29
Infeasibility of Marginal Cost Pricing of an Information Product
Figure 26-5, Panels (a) and (b)
Slide 26-30
Pricing for Information Products
In the long-run, price will equal average total cost.
This yields the long-run equilibrium condition of zero economic profit.
Firms selling information products in a monopolistically competitive industry will recover all their production costs.
Customers will pay more than marginal cost, but they will pay the minimum price necessary to call forth the product to market.
Slide 26-31
Issues and Applications:Selling Music Online
The online distribution of music is now a monopolistically competitive market.
To supply downloadable music to internet customers, firms must pay to acquire the music, to provide the bandwidth and other customer services, and to process credit cards.
Slide 26-32
Issues and Applications:Selling Music Online
More firms have been entering the industry of late, supplementing their revenues with pop-up ads.
Currently, there is a legal battle involving the use of Apple’s iPod technology.
Apple is trying to maintain some product differentiation within the online music industry.
Slide 26-33
Summary Discussion of Learning Objectives
Key characteristics of monopolistic competition
– Large number of small firms
– Differentiated products
– Easy entry and exit
– Advertising and sales promotion
Slide 26-34
Summary Discussion of Learning Objectives
Contrasting the output and pricing decisions of monopolistically competitive firms with those of perfectly competitive firms
– Monopolistically competitive firm• MR = MC determines output• Price set on demand curve• P > MC• P = ATC in the long run
Slide 26-35
Summary Discussion of Learning Objectives
Monopolistically competitive firms attempt to boost demand for their products through product differentiation
Providing an information product entails incurring relatively high fixed costs but low marginal costs
End of Chapter 26Monopolistic Competition