Monopolistic Competition
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Transcript of Monopolistic Competition
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Monopolistic
Competition
Trilok Prajna Prasad K Khushboo Akash
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• Large number of Sellers• Selling identical products• Difference in quality, features
etc.
Edward Chamberlin Joan Robinson
1930
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Characteristics
• Perfect substitutes• Size, taste, shape• Branding• Advertisement• Promotions
Product Differentiation• Many firms• Stiff competition• CD, Games , computers
Many Sellers or FirmsENTRY EXIT
• Flexibility• Entry & Exit
Free Entry and Free Exit• layoffs, discounts, credit
facilities
No price Competition• Less knowledge• Artificial impression• Non optimal evaluation
Lack of perfect knowledge
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In the Short RunSo what happens in the short run when the firm is making profits:
• New firms• Increased products• Reduces demand in the
market.• Demand curves shift to the
left.• profits decline.
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In the Short Run
Quantity0
Price
Q
P
AR
MR
ATC
(a) Firm Makes Profit
Averagetotal cost
Profit
MC
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In the Short RunSo what happens in the short run when the firm is making losses:
• Exiting markets• Less products • Demand increases• Demand curve shifts
right• Increases profits
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In the Short Run
AR
Quantity0
Price
P
Q
Averagetotal cost
(b) Firm Makes Losses
MR
LossesATC
MC
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In the Long RunSo what happens in the long run:
• Firms will enter and exit until the firms are making exactly zero economic profits.
Price = Average Total Cost
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In the Long Run
Quantity
Price
0
ARMR
ATC
MC
Q
P = ATC
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Monopolistic Competition: Welfare of Society
• Deadweight loss• Too much or Too little
entry
Amount produced
Price
P
Q
ATC
MC=S
MR
D
PROFIT
Deadweight loss
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Monopolistic Competition: Welfare of Society
Externalities of entry:
• The product-variety Externality
• The business-stealing Externality
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Advertising
• Advertisement to attract more buyers• 10-20% revenue on advertising• 2% of revenue on advertising
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• Critics• To Manipulate tastes• More different products
Advertising
• Defenders• Information to consumers• Provides great variety of products• Good quality products
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Case Study: McDonalds
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Competition to McDonald’s
Kentucky's Fried Chicken (KFC)
Burger King Starbucks
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Competitive techniques
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Competitive techniques
• Remodeling of stores• Replacement of chairs and
glasses• New interior design
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Non price competition
• 31000 restaurants and in 119 countries
• Large Dining Areas• Zones for larger groups, eat-and-run
customers, and for those who stay there to rest.
• Flat Screen TVs• Drive through in inside and outside the
restaurants
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External competition
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Case Study: Apple
• Founded on April 1, 1976• Makers of IPhone, IPad and Ipods• Largest Information technology company by
revenue
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Competitors
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Differentiated Products
iPhoneiPod
Macbook air
Macintosh iPad
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Differentiated Products
• Innovative Products• Differentiated on the basis of its attributes• Quality products
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Differentiated Products
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Thank You