EC131 Economics for Business - Topic 3 (part 3): Monopolistic Competition

Flashcards covering monopolistic competition, advertising, branding, and contestable markets. Includes definitions, examples, and key concepts.

What is monopolistic competition?

A market structure in which many firms sell products that are similar but not identical.

What are the characteristics of monopolistic competition?

Many sellers, product differentiation, and free entry.

Give examples of monopolistic competition.

Restaurants, computer games, hotel accommodation, beauty consultants, etc.

In the short run, when does a monopolistically competitive firm make a profit?

When, at this quantity, price is above ATC.

In the short run, when does a monopolistically competitive firm make losses?

When, at this quantity, price is less than ATC.

What happens to supply when firms are making profits in a monopolistically competitive market?

Supply increases.

What happens to prices when new firms enter a monopolistically competitive market?

Prices fall.

In the long run, what happens to the demand curve for an individual monopolistically competitive firm?

It shifts to the left.

How does a perfectly competitive firm differ from a monopolistically competitive firm in the long run?

Only the perfectly competitive firm produces at the efficient scale.

How do perfectly competitive and monopolistically competitive markets differ regarding price?

Price equals MC under perfect competition, but price is above MC under monopolistic competition.

What are monopolistically competitive firms known for using?

Advertising and branding.

What is the critique of advertising?

Critics of advertising argue that firms advertise to manipulate tastes and that much advertising is psychological rather than informational.

What is the defense of advertising?

Defenders of advertising argue that firms use advertising to provide information and that advertising also fosters competition.

How can advertising serve as a signal of quality?

The fact that firms pay celebrities large amounts of money to make advertisements signals that the product is quality and is worth customers buying.

How does branding help a business?

Branding helps a business create an identity for itself and highlights the way in which it differs from its rivals.

What is a critique of branding?

Branding causes consumers to perceive differences that do not really exist.

What is a defense of branding?

Brand names provide consumers with information which cannot be easily judged in advance of purchase and give firms an incentive to meet consumer needs.

What is one source of inefficiency in monopolistic competition?

The mark-up of price over marginal cost.

What type of loss exists in a monopolistically competitive market?

The normal deadweight loss of monopoly pricing.

What influences firms in a perfectly contestable market?

The threat of new entrants into a market.

What do firms do the more highly contestable a market is?

Firms may try to erect artificial barriers to prevent entry.

What is entry limit pricing?

Where a firm will keep prices lower than they could be in order to deter new entrants.

What is predatory or destroyer pricing?

Where firms hold price below average cost for a period to try and force out competitors or prevent new firms from entering the market.

What characteristics does a competitive advantage have?

Being both distinctive and defensible.

What is a 'hit and run' tactic?

Free entry and exit into and out of a market.

What is cream-skimming?

Some firms focusing on serving the most profitable parts of the market while avoiding less profitable customers.

Give examples of contestable markets.

Financial services; airlines, especially flights on domestic routes; the IT industry and in particular, Internet service providers (ISPs), software and web developers; energy supplies; and the postal service.