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Econ606 chapter 13 2020
- 2. ©2021 McGraw Hill Education. All rights reserved. No rproduction or further distribution without the prior written consent of McGraw Hill Education. Monopolistic Competition Price and Output in Monopolistic Competition Monopolistic Competition and Efficiency Product Variety 13-2 Chapter Contents
- 3. Market Structures Between Pure Competition and Pure Monopoly • Pure competition and pure monopoly are two extreme market structures. • Most markets in real world are somehow between them. • Several firms in market • Differentiated products • Strategic behavior 13-3
- 4. Monopolistic Competition and Oligpoly • Two market structures considered • Monopolistic competition (This chapter) • Product differentiation • Relatively large number of sellers • Oligopoly (Next chapter) • Few firms interact each others • Many different oligopoly models for different behavior assumptions 13-4
- 5. Industry Concentration • Two measurements of Industry concentration • 4-firm concentration ratio (CR) • Percentage of sales by 4 largest firms • Herfindahl index (HI) • Sum of squared market shares HI = (%S1)2 + (%S2)2 + (%S3)2 + …. + (%Sn)2 LO13.1 13-5 4-firm CR = output of four largest firms total output in the industry
- 6. Low Concentration Industries (1) Industry (2) Percentage of Industry Output Produced by the Four Largest Firms (3) Herfindahl Index for the Top 50 Firms (1) Industry (2) Percentage of Industry Output Produces by the Four Largest Firms (3) Herfindahl Index for the Top 50 Firms Jewelry 32 550 Ready-mix concrete 14 89 Plastic pipe 31 303 Sawmills 14 93 Plastic bags 28 320 Textile bags 13 93 Asphalt paving 25 230 Wood pallets 12 55 Bolts, nuts, and rivets 23 198 Stone products 12 56 Women’s dresses 22 236 Textile machinery 10 58 Wood trusses 21 158 Metal stamping 10 52 Curtains and draperies 20 172 Signs 9 36 Metal windows and doors 17 143 Sheet metal work 8 29 Quick printing 17 108 Retail bakeries 5 12 13-6 LO13.1 Percentage of Output Produced by Firms in Selected Low-Concentration U.S. Manufacturing Industries
- 7. Monopolistic Competition • Monopolistic competition • Relatively large number of sellers • Product differentiation • Easy entry and exit • Nonprice competition like advertising LO13.1 13-7
- 8. Characteristics of Monopolistically Competitive firm • Each firm has small share of market • Production differentiation • Brand loyalty • Monopoly power within own market • Competitor produce similar substitutes • Demand is downward-sloping, but highly elastic • Demand shifts when competitors introduce identical or near identical products 13-8
- 9. Price and Output in Monopolistic Competition • Profit-maximizing monopolistically competitive firm produces at MR = MC • In short run it acts like monopoly • Earn an economic profit • In Long run competitors enter the market and introduce near-identical products • Demand decreases • Earn normal profit LO13.2 13-9
- 10. A Monopolistically Competitive Firm: Short Run Profits • In short run, a monopolistically competitive firm has monopoly power in own brand market. • Market demand is downward sloping because of close substitutes: When a price increases, consumers will switch brands. • To maximize total profits, a firm chooses quantity where MR = MC. • If price is higher than ATC, a firm will make profit in short run. LO13.2 13-10 Quantity (a) Short-run profits Priceandcosts MR = MC MC MR D1 ATC Economic profit Q1 A1 P1 0
- 11. A Monopolistically Competitive Firm: Short Run Losses • If price is lower than ATC, a firm will make profit in short run. LO13.2 13-11 Quantity (b) Short-run losses Priceandcosts MC MR D2 ATC Loss Q2 A2 P2 0 MR = MC
- 12. A Monopolistically Competitive Firm: Long Run Equilibrium • If a firm makes profits in short run, in long run other firms will introduce similar products. Then, the demand for own brand product will decrease (demand curve will shift to left). • If a firm makes losses in short run, in long run some firms which make similar products will exit. Then, the demand for own band product will increase (demand curve will shift to right). • Entry and exit continue until monopolistically competitive firms make zero economic profits in long run. LO13.2 13-12 Priceandcosts MC MR D3 ATC Q3 P3 = A3 0 MR = MC Quantity (c) Long-run equilibrium
- 13. Monopolistic Competition and Efficiency • Monopolistic competition is inefficient in long run • Productive inefficiency because P > min ATC • Allocative inefficiency because P > MC • Excess capacity: Firms will produce a quantity for profit- maximization (at MR = MC), which is less than the quantity at minimum ATC. LO13.3 13-13
- 14. The Inefficiency of Monopolistic Competition • ATC is minimum at b when Q4 units are produced. • Firm chooses profit maximization at d and produces Q3 units. LO13.3 MC MR D3 ATC Q3 Quantity Priceandcosts 0 P3 = A3 Q4 Excess capacity M4 MC MR D3 ATC a b d c A4 Q3 Q4 P3 = A3 MR = MC
- 15. 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 LO13.4 13-15
- 16. Last Word: Higher Wages, 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 the consequences of policy. 13-16