Version3 Monopolistic Competition Group 4

8/6/2019 Version3 Monopolistic Competition Group 4

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Group 4:Group 4:

Joan Abarca

Generosa BacaniDaniel Coquinco

Michelle GermanoDanielle Reyes


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Competitive Price Searcher Market vs.Competitive Price Searcher Market vs.Price Taker Market Price Taker Market

Real Estate Industry in the PhilippinesReal Estate Industry in the Philippines

Monopolistic CompetitionMonopolistic CompetitionCha r a ct risticsCha r a ct risticsCompa ris on of di ffe r en t ma rk e t str ct r e sCompa ris on of di ffe r en t ma rk e t str ct r e sPr of it ax im iza ti on in t he Sho rt r n an dPr of it ax im iza ti on in t he Sho rt r n an d

Long r nLong r nPr ob lem s wit h monopo listic a ll compe titiv e Pr ob lem s wit h monopo listic a ll compe titiv e

f ir m sf ir m sPric e iscri m ina ti onPric e iscri m ina ti on

ExercisesExercises


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Pric e Sea rc he r a rk e t Pric e Sea rc he r a rk e t Pric e Ta k e r a rk e t Pric e Ta k e r a rk e t

Low entry barriersLow entry barriers ensuresensuresthat these markets arethat these markets arecompetitivecompetitiveFirms that face a downwardFirms that face a downwardsloping demand curvesloping demand curve product differentiationproduct differentiation

Monopolistic CompetitionMonopolistic Competition with low entry barrierswith low entry barriers

Large number of firms exist Large number of firms exist in the market in the market Firms produce identicalFirms produce identicalproductsproducts

No barriers limit the entryNo barriers limit the entryand exit of firms in the market and exit of firms in the market Each firm supplies a smallEach firm supplies a smallportion of a total amount portion of a total amount supplied in the market supplied in the market


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Real Estate Industry (Philippines)

TheThe RealReal EstateEstate industryindustry of of thethe PhilippinesPhilippines isis oneone of of thethe mostmostpowerfulpowerful propertyproperty industriesindustries inin AsiaAsia..DueDue toto recentrecent economiceconomic trends,trends, PhilippinesPhilippines hashas becomebecome a amoremore inin--demanddemand marketmarket forfor realreal estateestate opportunities,opportunities, moremorespecifically,specifically, thethe riserise of of demandsdemands forfor residentialresidential housinghousing andandofficeoffice spacesspaces. .TheThe promisingpromising outlookoutlook forfor thethe residentialresidential sectorsector of of thethePhilippinePhilippine RealReal EstateEstate industryindustry isis fuelledfuelled byby risingrising incomesincomes

duedue toto thethe steadysteady riserise inin thethe PhilippinePhilippine economyeconomy forfor thethe pastpastseveralseveral years,years, asas wellwell asas massivemassive interestinterest amongamong overseasoverseasFilipinosFilipinos wantingwanting toto establishestablish permanentpermanent or or temporarytemporaryresidenceresidence inin thethe countrycountry of of theirtheir birthbirth. .MostMost househouse purchasespurchases areare donedone eithereither inin cashcash oror throughthroughprepre--selling,selling, asas thethe financialfinancial marketmarket isis relativelyrelatively undevelopedundeveloped. .


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Company NameCompany Name DescriptionDescription Parent/HolParent/Holdingding

CompanyCompany

Latest ProjectLatest Project

SM Development SM Development CorporationCorporation

fast-growing residential propertydeveloper focusing on thepremium middle market,expertly balancing key housingfactors of quality, style,durability, and affordability

SMInvestmentCorporation

SM My Place

Avida Land Avida Land CorporationCorporation

leading provider of affordablehomes to Filipino families inideal communities that securetheir future

Ayala Land,Inc.

Avida Towers Cebu

Robinsons Land Robinsons Land CorporationCorporation

one of the country's leading realestate companies, is engaged inthe development and operation

of shopping malls and hotels,mixed-use properties, officebuildings, residentialcondominiums, as well as landand residential housing projectsin key cities and other urbanareas nationwide

JG SummitHoldings

Robinsons Luxuria sSonata PrivateResidences


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RestaurantsRestaurantsPlumbers/electricians/local buildersPlumbers/electricians/local buildersPrivate schoolsPrivate schoolsPlant hire firmsPlant hire firmsInsurance brokersInsurance brokersHealth clubsHealth clubsHairdressersHairdressersFuneral directorsFuneral directorsEstate agentsEstate agentsDamp proofing control firmsDamp proofing control firms

O ther examples:O ther examples:


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La r ge numbe r of f ir m s in t he in du strLa r ge numbe r of f ir m s in t he in du streach firm has a small proportion of the market shareeach firm has a small proportion of the market share

Pr odu cts/ goo ds a r e di ffe r en ti a t e dPr odu cts/ goo ds a r e di ffe r en ti a t e deach firm faces a downwardeach firm faces a downward- -sloping demand curvesloping demand curveno perfect substitute of other firms can be found for a product byno perfect substitute of other firms can be found for a product by

one firm.one firm.F ir m s may ha ve some e lemen t of con tr o l ove r p ric e lik e in F ir m s may ha ve some e lemen t of con tr o l ove r p ric e lik e in monopo lymonopo ly

price setter/price searcherprice setter/price searcherindependent decision makingindependent decision makingfirms don't take the reaction of rivals into account when choosingfirms don't take the reaction of rivals into account when choosing

prices and sales targetsprices and sales targetsCompe titi on on Qua lit y an d a rk e ti ngCompe titi on on Qua lit y an d a rk e ti ng

Quality is design, reliability, service provided to buyer and ease of Quality is design, reliability, service provided to buyer and ease of access to product access to product

MarketingMarketing firm must market = promotion, distribution,firm must market = promotion, distribution,packagingpackaging

E n tr y an d ex it f rom t he in du str y is r e la tiv e ly ea syE n tr y an d ex it f rom t he in du str y is r e la tiv e ly ea syfew barriers to entry and exit few barriers to entry and exit

Characteristics:Characteristics:


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CharacteristicsCharacteristics PerfectPerfectCompetitionCompetition

MonopolisticMonopolisticCompetitionCompetition

O ligopolyO ligopoly MonopolyMonopoly

N umber of firms

Infinite many Few one

Products homogenous Differentiated either unique

Pricing power Price taker Price searcher Pricesearcher

Price searcher

Free entry yes Yes Limited no

Demand Elasticity

Perfectly elastic Highly elastic inthe long run

Depends onpricingstrategy

Relativelyinelastic


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yy TheThe profit profit--maximizing levelmaximizing level of output is aof output is aproduction level that achieves the greatest production level that achieves the greatest level of economic profit given existinglevel of economic profit given existingmarket conditions and the firm smarket conditions and the firm sproduction cost. For a monopolisticallyproduction cost. For a monopolisticallycompetitive firm, thiscompetitive firm, this entails adjusting theentails adjusting theprice and corresponding production levelprice and corresponding production levelto achieve the desired match between totalto achieve the desired match between totalrevenue and total cost.revenue and total cost.

Profit Maximization:Profit Maximization:


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MC = MRMC = MR

In theIn the short runshort run , firms may make, firms may make positive,positive,zero or negative profitszero or negative profits ..

A monopolistically competitive firmearning short-run profits A monopolistically competitive firmsuffering short-run losses

ProfitsLosses

MC MC

ATC

Demand

MR

Po

MC = MR

Qo

ATC

Demand

MR

P1

MC = MR

Q 1


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In theIn the long runlong run , entry and exit are both, entry and exit are both

possible. This result topossible. This result to firms profitsfirms profits beingbeingequal to zeroequal to zero ..

ProfitsLosses

MC MC

ATC

Demand

MR

Po

MC = MR

Qo

ATC

Demand

MR

P1

MC = MR

Q 1

D

D


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INEFFI CIEN CY INEFFI CIEN CY

ADVER TI SING ADVER TI SING

CRE ATION OF R AN D N AME SCRE ATION OF R AN D N AME S


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The r e a r e tw o sou rc e s of ineff ici en cy in t he MC The r e a r e tw o sou rc e s of ineff ici en cy in t he MC ma rk e t str u ct u r e :ma rk e t str u ct u r e :a t its op ti mum ou t pu t t he f ir m cha r ge s a p ric e t ha t a t its op ti mum ou t pu t t he f ir m cha r ge s a p ric e t ha t ex cee ds ma r gina l costs, t he MC f ir m max im ize s p r of itsex cee ds ma r gina l costs, t he MC f ir m max im ize s p r of itswhe r e MR = MCwhe r e MR = MC

The monopoly power possessed by an MC firm means that at its profit The monopoly power possessed by an MC firm means that at its profit maximizing level of production there will be a net loss of consumer andmaximizing level of production there will be a net loss of consumer andsurplussurplus for producer.for producer.

t ha t MC f ir m s ope r a t e wit h ex ce ss c apa cit yt ha t MC f ir m s ope r a t e wit h ex ce ss c apa cit ythe MC firm's profit maximizing output is less than the output associatedthe MC firm's profit maximizing output is less than the output associatedwith minimum average cost.with minimum average cost.


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MO NO PO LISTIC CO MPETITIO N VERSUSMO NO PO LISTIC CO MPETITIO N VERSUSPERFECT CO MPETITIO NPERFECT CO MPETITIO N

Monopo listicMonopo listic P e r fe ct Pe r fe ct


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ADVERTISING AND MO NO PO LISTIC CO MPETITIO NADVERTISING AND MO NO PO LISTIC CO MPETITIO N

Perfectly competitive firms have no incentive to advertise,Perfectly competitive firms have no incentive to advertise,but monopolistic competitors dobut monopolistic competitors do

The goals of advertising are to increase demand (shiftThe goals of advertising are to increase demand (shiftdemand curve to the right) and make demand moredemand curve to the right) and make demand moreinelasticinelastic

Advertising increases ATC, shifting the ATC curve up Advertising increases ATC, shifting the ATC curve up


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B RAND NAMEB RAND NAME

A brand name is valuable to a firm; it makes theA brand name is valuable to a firm; it makes thedemand less elastic and can enable the firm todemand less elastic and can enable the firm toearn higher profits.earn higher profits.

Once a consumer has had a positive experienceOnce a consumer has had a positive experiencewith a good, the price elasticity of demand forwith a good, the price elasticity of demand forthat good typically decreasesthat good typically decreases the consumerthe consumerbecomes loyal to the product.becomes loyal to the product.


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A practice whereby a seller charges different A practice whereby a seller charges different consumers different prices for the same product orconsumers different prices for the same product orserviceservice

Price searchers gain:Price searchers gain:1.1. identify and separate at least two groups withidentify and separate at least two groups with

differing elasticities of demand, anddiffering elasticities of demand, and2.2. prevent those who buy at the low price fromprevent those who buy at the low price from

reselling to the customers charged higher pricesreselling to the customers charged higher prices


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Examples:Examples:Airlines: Class of service / advance seat saleAirlines: Class of service / advance seat saleRetail: Discount coupons, volume pricingRetail: Discount coupons, volume pricing

Telecoms: Off Telecoms: Off- -peak ratespeak ratesHotels: Off Hotels: Off--season ratesseason ratesEducation: Financial aidEducation: Financial aidSenior citizen / Student discountsSenior citizen / Student discounts

Frequent customer incentivesFrequent customer incentives


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Seller charges a single priceSeller charges a single price Seller uses priceSeller uses pricediscriminationdiscrimination

less elastic demand group

N e t ope r a ti ng r evenue : $30,000 N e t ope r a ti ng r evenue : $36,000

Source: Microeconomics, Gwartney, Stroup, et al. (11 th ed.) 2006


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Residential condosResidential condosPayment termsPayment termsFreebiesFreebies


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Africa Africa LandLand ownsowns aa realreal estateestate developer developer thatthat sellssells

condominiumcondominium unitsunits inin anan open,open, priceprice--searcher searcher marketmarket. . ToTo

developdevelop her her pricingpricing strategy,strategy, Aleq Aleq hiredhired anan economisteconomist toto

estimateestimate her her demanddemand curvecurve. . ColumnsColumns ( (11)) andand ((22)) of of thethe

followingfollowing chartchart provideprovide thethe datadata for for thethe expectedexpected weeklyweeklyquantityquantity demandeddemanded for for Aleqs Aleqs condominiumcondominium unitsunits atat

alternativealternative pricesprices. . Aleqs Aleqs marginalmarginal (and(and average)average) costcost of of

supplyingsupplying eacheach condominiumcondominium unitunit isis constantconstant atat PhpPhp..

55,,000000,,000000 per per condominiumcondominium unitunit nono matter matter howhow manymany unitunit

sheshe sellssells per per weekweek inin thisthis rangerange. . ThisThis costcost includesincludes allall

opportunityopportunity costscosts andand representsrepresents thethe economiceconomic costcost per per

condominiumcondominium unitunit..


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A. A. FindFind Aleqs Aleqs economiceconomic profitsprofits atat eacheach alternativealternative priceprice byby

calculatingcalculating thethe differencedifference betweenbetween totaltotal revenuerevenue andand totaltotal

costcost. .

B.B. FindFind Aleqs Aleqs marginalmarginal revenuerevenue andand marginalmarginal costcost fromfrom thethe

salesale of of eacheach additionaladditional condominiumcondominium unitunit..

C.C. If If Aleq Aleq wantswants toto maximizemaximize her her profits,profits, whatwhat priceprice shouldshould

sheshe chargecharge per per condominiumcondominium unit?unit?

D.D. HowHow manymany condominiumcondominium unitsunits willwill Aleq Aleq sellsell per per weekweek atatthethe profitprofit--maximizingmaximizing price?price?

E.E. WhatWhat willwill Aleqs Aleqs profitsprofits bebe per per weekweek atat thisthis priceprice andand salessales

volume?volume?


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Than k you!

Version3 Monopolistic Competition Group 4

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