Monopolistic Competition: chapter 16

What are the three key features of a monopolistically competitive market?

Many sellers, product differentiation, and free entry & exit.

What is an example of a product in a monopolistically competitive market?

Apartments, clothing, bottled water, fast food, books, night clubs.

How does monopolistic competition compare to perfect competition?

Monopolistic competition has many sellers, differentiated products, and some price control.

What is the profit maximization condition for a monopolistically competitive firm?

Firms maximize profit where marginal revenue (MR) equals marginal cost (MC).

What happens to profits in the long run in a monopolistically competitive market?

Profits become zero due to free entry and exit of firms.

How does price relate to marginal cost in monopolistic competition?

Price is greater than marginal cost (P > MC), indicating market power.

What is a key difference in output between perfect competition and monopolistic competition?

Monopolistic competition produces less than the efficient scale.

What is the welfare effect of monopolistic competition?

There is deadweight loss because price is greater than marginal cost.

What are the two externalities from entry in monopolistic competition?

Product-variety externality (positive) and business-stealing externality (negative).

Why do firms advertise in monopolistic competition?

To convince buyers that their product is unique due to product differentiation.

What are some criticisms of advertising?

It wastes resources, manipulates tastes, creates brand loyalty, and raises prices.

What are some defenses of advertising?

It provides useful information to customers, helps compare prices, and increases competition.

What was the outcome of the study on eyeglasses prices related to advertising?

Eyeglasses were cheaper where ads were allowed.

What was the profit outcome for Colgate when considering advertising?

Colgate would incur a loss of $5.5 million and should not advertise.

What was the profit outcome for Crest when considering advertising?

Crest would earn a profit of $22 million and should advertise.

What do critics say about brand names?

They claim products aren't very different and consumers irrationally pay more.

What do defenders say about brand names?

They argue that brand names provide quality information and firms have an incentive to maintain high quality.

What is the long-run outcome for a monopolistically competitive firm?

Zero economic profit where price equals average total cost (P = ATC), but price is still greater than marginal cost (P > MC).

What is the conclusion about monopolistic competition compared to perfect competition?

Monopolistic competition has excess capacity and higher prices than perfect competition.