Foundation of Microeconomics Alaleh Mani 2010

1. Monopolistic
Competition
Microeconomics Foundation
Alaleh Mani
2010

2. Features
1- a large number of firms compete:
 Small Share for every firm so only small deviation
 Ignore other firms with small share
 collusion among many firms for higher price agreement is impossible
2-Differentiated products (CFA 2009) with close substitution
exp: different running shoes with different price, however the high priced
good never disappear from market (CFA 2008)
3- Competing on:
 -Quality or physical attribute:
 Nice Design
 Reliable quality
 Services provided
 Ease to access to product and its service
 -Price more for higher quality in downward slope for demand
 -Marketing: Both higher quality and lower quality need to advertise
 Advertising
 Packaging
 Entry and Exit that cause a zero economic profit in long run

3. Economic profit and loss
Profit Loss
Break Even

4. Monopolistic competition and
Monopoly
 The only different lies in what happens next
when firms either make an economic profit or
economic loss .
 It means see if the social demand can meet
the average total cost of a firm
 ATC in monopoly is in its minimum location
however in monopolistic competition it differs
 Demand curve for monopolistic competition
firms due to close substitution of goods and
services are more elastic than in monopoly
firms

5. Monopolistic competition Vs
Perfect Competition
Markup
Min ATC
Excess Capacity
Long Run Monopolistic
competition with break even
situation

6. Excess Capacity
 Excess Capacity = Efficient Quantity –
Actual Quantity
 If firms sell more in less price to cover the
excess capacity they incur loss because
P<ATC because demand do not meet
ATC
 Exp: vacant table in restaurant

7. Efficiency
 Since MSC ≠ MSB  not efficient
 Product variety is valued and costly
 Design and Marketing for variety=Set up costs
 CONFORMITY IN PRODUCTS IS EFICIENT
BUT NOT ATTRACTIVE

8. Development and Marketing in
Decision
Innovation (cfa 2009): for firm to restore the
economic benefit in monopolistic sys is to gain
innovation:
imitator and competitors innovate a close
substitution to gain from initial advantages
1. Profit maximizing :
Marginal revenue of a developed product must be
equal to Marginal cost of developing the product
2.Efficiency:
Marginal Social Benefit of developed product must be
equal to marginal social cost of developing product
Monopolistic Firms prefer profit maximizing to efficiency

9. Development and Marketing
in Decision
 Advertisement: manipulate the consumer
concept of their product
Expenditure: hard to estimate however
generally close to 15% of the price goes for ad.
name as (selling cost)
Advertisement Expenditure and selling cost
increase the costs and change the demand
(Sweser 2009):
 Costs
 Demand

10. Selling cost and total cost
 Adand selling costs are FIXED COST so
ATC increases
from a to be
Second Cost fall
With Ad cost
No Ad cost

First Ad increase
demand

11. Selling cost and Demand
 Ad decrease the demand or other firms
 Make the demand curve more elastic
 Lower the markup and price
 Again here efficiency is ambiguous
sell more off- set the ad costs and
make variety of production

12. Some points
 Advertisement of well known Firms like
Coca cola is to signaling about their
serious remaining in the market
 Brands:
 provide information of high quality to
consumer
 provide incentive to stick to high
quality standard to producer to meet the
expectation