chapter 13. monopolistic competition
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Transcript of chapter 13. monopolistic competition
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Annu S PantVisiting Faculty of EconomicsKathmandu University2010
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In This Lecture…Monopolistic
Competition – Pricing and Production Decision in Short Run and in Long Run
Oligopolistic Competition – Features and distinction from Monopolistic Competition
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Monopolistic Competition
The theory of monopolistic competition is built on three assumptions:
There are many sellers and buyers.Each firm in the industry produces
and sells a slightly differentiated product.
There is easy entry and exit.
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Monopolistic Competition
The monopolistic competitor is a price searcher.
For the monopolistic competitor, P > MR, and the marginal revenue curve lies below the demand curve.
The monopolistic competitor produces the quantity of output at which MR =MC.
It charges the highest price per unit for this output.
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Monopolistic Competitive Firm’s Output and Price
(short-run) The monopolistic
competitor produces that quantity of output for which MR = MC at q1.
It charges the highest price consistent with this quantity, which is P1.
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The Monopolistic Competitive Firm’s Long-run Equilibrium
Output and PriceUnlike the perfectly competitive firm,
the monopolistic competitor does not exhibit resource allocative efficiency.
Unlike the monopoly firm, the monopolistic competitive firm cannot earn profits in the long run (because of easy entry into the industry) unless it can successfully differentiate its product (e.g., by brand name) in the minds of buyers.
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The Monopolistic Competitive Firm’s Long-run Equilibrium
Output and Price Because of easy
entry into the industry, there are likely to be zero economic profits in the long run for a monopolistic competitor. In other words, P = ATC.
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Oligopoly
A theory of market structure based on three assumptions:
There are few sellers and many buyers.
Firms produce and sell either homogeneous or differentiated products.
There are significant barriers to entry.
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Oligopolist
The oligopolist is a price searcher.It produces the quantity of output at
which MR = MC.
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Types of Oligopoly
Perfect or Imperfect OligopolyNon-collusive or Collusive OligopolyDuopoly
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Types of Oligopoly
Perfect or Imperfect Oligopoly If in an Oligopoly market, the firms
produce homogeneous products it is called perfect oligopoly.If the firms produce differentiated products, it is called imperfect oligopoly.
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Types of Oligopoly
Non-collusive or Collusive OligopolyIf in an oligopoly market firms compete with each other it is called non-collusive oligopoly market or non-cooperative oligopoly market.If the firms cooperate with each other in determining price or output or both, it is called collusive oligopoly or cooperative oligopoly.
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Types of Oligopoly
DuopolyWhen there are only two firms producing a product, it is called duopoly. It is a special case of oligopoly.
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Oligopoly vs Monopolistic Competition
Number of buyers and sellersIn an oligopoly market, there
are few sellers but large number of buyers.
In monopolistic competition, there are large number of buyers and sellers.
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Oligopoly vs Monopolistic Competition
Nature of ProductIn oligopoly market, the product
may be homogenous or differentiated.In monopolistic market, the
products are differentiated.Entry/ exit of firms
In oligopoly market, the entry and exit of firms are restricted while in monopolistic market it is not.