Monopolistic Competition, Microeconomics
- 1. 10 | Monopolistic Competition SR and LR Equilibrium, Advertising, Consumer surplus in MC ECO217 Microeconomics I
- 2. ECO217 Autumn 2013/2014 2 of 9 Monopolistic competition Monopolistic competition – market organization in which there are many firms selling closely related but not identical commodities. Example – different washing powders in market, different watches etc Sellers have some degree of control over the prices – thus they face negatively sloped demand curve. Existence of many close substitutes limits the sellers “monopoly” In monopolistic competition firms face highly elastic demand curve Important is advertising, location of business, qualification of seller etc. which allows to increase price
- 3. ECO217 Autumn 2013/2014 3 of 9 Monopolistic competition 1. Goods are not homogeneous, but can be substituted easy. Market is not fully competitive 2. Producer can enter market easy and leave it easy 3. Producers can not influence other suppliers in market. If seller lowers price, consumers for his/her good increase and vice versa. 4. Even goods are different their substitutability is high. Price differentiation is possible 5. In some markets monopolies can emerge as goods are different. Example, pharmaceutical companies improving quality of medicine etc. 6. Important are brand names. Products of famous companies are sold at higher price
- 4. ECO217 Autumn 2013/2014 4 of 9 Monopolistic competition Short-run equilibrium Profit maximized when MC = MR
- 5. ECO217 Autumn 2013/2014 5 of 9 Monopolistic competition Long-run equilibrium – if firms make economic profit in SR, new firms will enter until all profit is squeezed out Minimum efficient scale – the smallest quantity which the average cost curve reaches its minimum
- 6. ECO217 Autumn 2013/2014 6 of 9 Advertising in monopolistic competition Advertising increases AC Might give temporally advantage over other firms Advertising can also reduce price if per unit cost decreases at higher output levels
- 7. ECO217 Autumn 2013/2014 7 of 9 Group buying in monopolistic competition
- 8. ECO217 Autumn 2013/2014 8 of 9 Normal price is $200, at sale hotel lowers price to $159 and increases profit if price is in elastic side of demand curve. Guy in video thinks it is the lowest possible price of this hotel. This hotel sells rest of rooms for priceline.com for customers who bid at prices from $159 and below. Bidders below $50 will not get room, but between $159 to $50 will be given room if available. Customers can bid only once a day!!! This effectively hides MC level from them. hotel’s demand curve
- 9. ECO217 Autumn 2013/2014 9 of 9 Dr. Martins Priede ECO217 Microeconomics I [email protected]