Microeconomics Final

Monopolistic Competition

• Key Characteristics

1. Many firms

   1. large number of firms with a small market share

   2. each firm acts independently

2. Low Barriers to Entry

   1. potential competitors are always looking to enter the market

3. Differentiated Products

   1. each firm has a monopoly over exact differentiation

   2. there are many close substitues for each product

   3. Advertising is used to increase demand, differentiate products, and make demand less elastic

• Demand and Marginal Revenure

  • downward sloping demand curve

  • marginal revenure slpoes downward below the demand curve

• Maximizing Profit in the Short Run

  • Produce where MC=MR

  • Find Demand curve for price

• Profits in the Long Run

  • no barriers to entry mean no long run profits

• Differences with Perfect Competition

  • Monopolistically Competitive Firms have P>MC

  • Do not produce at minimum ATC

• Does not acheive productive or allocative efficiency

  • BUT consumers benefit from differentiation

Oligopolies

Small number of firms

• interdependance

• barriers to entry

  • economies of scale: firms LRATC falls as output increases

  • ownership of key input

  • govt imposed barriers: lobbyists get favorable laws, patents, licensing requirements, restrictions on international trade

• mergers

  • vertical or horizontal

• network effects

• competing technologies or opting for incompatibility

• Measures of Concentration in a Market

  • Concentration Ratio

    • greater that 40% typically indicates that an industry is an oligopoly

  • HHI

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