Powerpoint Chapter 12 - Monopolistic Competition

Monopolistic Competition

• Monopolistic Competition

  • Relatively large number of sellers

  • Product Differentiation

  • Easy entry and exit

  • Nonprice Competition like advertising

Monopolistically Competitive Industries

• Industry concentration

• Measured by 4-Firm Concentration Ration

  • Percentage of sales by 4 largest firms

    • 4-Firm Concentration Ration = Output of four largest firms / Total output in the industry

• Herfindahl Index

  • Sum of squared market shares

    • Herfindahl Index = (%S₁)² + (%S₂)² + (%S₃)² + … +(%S_n)²

Price and Output in Monopolistic Competition

• Demand is highly elastic

• Short run profit or loss

  • Produce where MR = MC

• Long run only a normal profit

  • Entry and exit

Monopolistic Competition and Efficiency

• Monopolistic competition inefficient

  • P > Minimum ATC is condition for productive inefficiency

  • P > MC is condition for allocative inefficiency

• Excess Capacity

Product Variety

• The firm constantly manages price, product, and advertising

  • Better product differentiation

  • Better advertising

• The consumer benefits by greater array of choices and better products

  • Types and styles

  • Brands and quality

More McRestaurants

• Higher minimum wage favors big hamburger chains

• Big chain restaurants are capital intensive so an increase in the minimum wage doesn’t affect them much

• Mom and Pop restaurants are labor intensive so an increase in the minimum wage can put them out of business

• Politicians and the public need to be aware of consequences of policy