chapter 17: monopolistic competition

Perfect Competition (PC)
- In the long run $P = \text{min } ATC$ .
- Economic profit $\pi = 0$ ("normal" profit only).
- Price sits at the very lowest point of the average-cost curve—"the cheapest you could make it and still stay in business."
Monopolistic Competition (MC)
- Long-run price remains above the minimum average cost.
- Despite that markup, entry drives economic profit to $\pi = 0$ in the long run.
Monopoly (M)
- Entry is blocked, so the firm can sustain \pi > 0 indefinitely.
- Graphically, the monopolist’s $P$ is set along the demand curve where $MC = MR$ , leaving an “economic-profit rectangle” $\pi = (P - ATC)Q$ .

Short run: all three structures can earn positive economic profit.
Long run:
- Perfect Competition → No (entry drives profit to zero).
- Monopolistic Competition → No (imitators & close substitutes bring profit to zero).
- Monopoly → Yes (barriers to entry protect profit).

Perfect Competition → Lowest possible price (price equals marginal & minimum average cost).
Monopolistic Competition → Intermediate price (markup over cost but below monopoly price).
Monopoly → Highest price (single firm with market power maximizes profit).

Efficiency means producing at the lowest Average Total Cost (ATC).
- Perfect Competition → Yes (by definition in long-run equilibrium).
- Monopolistic Competition → No (excess capacity; output is left of minimum-ATC quantity).
- Monopoly → No (operates where P > MC and typically to the left of minimum ATC).

Constant innovation: new cuts, colors, designs in clothing, shoes, bicycles, etc.
Consumers value individual expression → willing & able to pay for variety.
Producers’ incentive: shifting their firm-specific demand curve rightward/outward prolongs or revives positive economic profit.
- By differentiating, they escape (temporarily) the long-run zero-profit outcome.
Result: higher prices vs perfect competition but greater product diversity.

Essential because products are differentiated.
Objectives
- Shift firm’s demand outward (more buyers at each price).
- Create brand loyalty → reduces elasticity of demand → increases market power.
- Sustain or increase economic profits above “normal.”
Functions of advertising
- Inform about price, quality, availability.
- Act as a signal of product quality ("if a firm spends a lot, product must be good").
- Shape tastes/preferences (persuasion).
- Subsidize or lower consumer costs for other goods/services (e.g., free Google services funded by ads).

Firms in perfect competition rarely advertise individually—benefits spill over to rivals.
Industry-level (generic) campaigns instead:
- "Pork – The Other White Meat" (entire pork industry).
- Cotton promotion campaigns (encourage buying any cotton clothing).
- "Got Milk?"—initially for fluid milk when branding was minimal.
- Over time, milk diversified (organic, vitamin-enriched, “happy cow” milk), so brand advertising became feasible and generic ads faded.

Perfect Competition (long run): $P = MC = \text{min } ATC$ and $\pi = 0$ .
Monopolistic Competition (long run): P > \text{min } ATC,\; P = ATC \Rightarrow \pi = 0.
Monopoly: Chooses $Q$ where $MR = MC$ , charges $P$ on the demand curve above that $Q$ , so P > MC and \pi = (P - ATC)Q > 0.

Trade-off between efficiency & variety: consumers accept higher prices and some inefficiency for the benefit of diverse choices.
Advertising can enhance information but can also manipulate tastes—raises questions about consumer autonomy and social welfare.