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oligopoly
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a market structure in which only a few sellers offer similar or identical products
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monopolistic competition
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a market structure in which many firms sell products that are similar but not identical
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tennis balls
cigarettes
cigarettes
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give a few examples of a oligopoly firm
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novels
movies
movies
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give a few examples of monopolistic competition firm
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agriculture
wheat
milk
wheat
milk
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give example of perfect competition
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tap water
cable TV
cable TV
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give examples of monopoly
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many sellers (there are many firms competing for the same group of customers)
product differentiation (each firm produces a product that is at least slightly different from those of other firms. rather than being a price taker each firm faces a downward sloping demand curve)
free entry and exit (firms can enter or exit the market without restriction. thus, the number of firms in the market adjusts until economic profits are driven to zero)
product differentiation (each firm produces a product that is at least slightly different from those of other firms. rather than being a price taker each firm faces a downward sloping demand curve)
free entry and exit (firms can enter or exit the market without restriction. thus, the number of firms in the market adjusts until economic profits are driven to zero)
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list the three features of monopolistic competition
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oligopoly
monopolistic competition
monopolistic competition
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two examples of imperfectly competitive firm
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concentration ratio
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the percentage of total output in the market supplied by the four largest firms
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books
music CD's
movies
computer games
restaurants
piano lessons
cookies
furniture
music CD's
movies
computer games
restaurants
piano lessons
cookies
furniture
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list 8 different types of monopolistic competition
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in a monopolistic competition it departs from perfectly competitive ideal because each of the sellers offer some what of different products; whereas, oligopoly departs from perf. comp. because there are only a few sellers in the market. the small number of sellers makes rigorous competition less likely and strategic interactions among them vitally important. Lastly monopolistic has MANY sellers
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What makes an oligopoly and a monopolistic comp. different?
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monopoly
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One firm=
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oligopoly
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a few firms=
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first you have to ask question..
do the firms sell differentiated products? yes= mon. comp.
if the many firms sell identical products= perf. comp.
do the firms sell differentiated products? yes= mon. comp.
if the many firms sell identical products= perf. comp.
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many firms=
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the demand curve faces a downward sloping curve
(by contrast a perf. comp. has a horizontal demand curve)
(by contrast a perf. comp. has a horizontal demand curve)
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in a monopolistic competition.. since there are differentiated products what significance does this have on the demand curve?
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a monopolistic comp. produces where marginal cost equals marginal revenue and then uses the demand curve to set the price above the profit maximization quantity.
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in what was is a monopolistic competition firm like a monopoly with choosing where to produce and its price?
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entry of the market of other firms. this will shift the demand curve to the left. as the number of incumbent firms' products falls, these firms experience declining profits. eventually it is driven to zero economic profit
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when price exceeds ATC, then there is profit which encourages..? (LR)
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leave. exit will shift the demand curve to the right. as the demand for the remaining firms' products rises these firms experience risking profit. eventually driven to zero economic profit.
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when firms are making losses, ATC is above P, firms have an incentive to..?
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the demand curve barely touches the ATC curve. we say these two curves are tangent to each other. the point of tangency occurs at the same quantity where marginal revenue equals marginal cost. Also where it is in LR, the Price WILL equal ATC.
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how do you know if a monopolistic competitive firm is in the LR on a graph?
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because a monopoly is the sole seller in a market without close substitutes for its products it can earn pos. profits in long run. because there is free entry and exit into a mon. comp. market the economic profit of a firm in this type of market is zero.
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why can a monopoly earn positive economic profits in the long run and not mon. comp.?
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the perfectly comp. firm produces at the efficient scale, where ATC is minimized. the mon. comp. firm produces at less than the efficient scale. price equals marginal cost under perfect competition but price is above the marginal cost under monopolistic competition.
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whats different about the perf. comp. market and mon. comp. market in the long run?
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efficient scale
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the quantity that minimizes average total cost is called
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firms are said to have excess capacity. (think of it as the space between the efficient scale and where they are producing at the level below it.. the firm could increase the quantity it produces and lower the ATC of production. but no firm does this bc it would need to cut its prices to sell the additional output, and thats why it is more profitable for a monopolistic competitor to continue operating with excess capacity)
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in the long run perfectly competitive firms produce at the efficient scale (ATC crosses MC) ; however, monopolistically competitive firms produce below that level. in result to this..
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perf. comp. produces at the price where price equals marginal cost. but for a mon. comp. firm they produce where price exceeds marginal cost because they always have some market power. the mon. comp. firm Marks up over Marginal Cost
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what is the second difference with perf. comp. and mon. comp. markets dealing with price wise?
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the zero profit condition only ensures that price equals ATC. it DOES NOT ensure that price equals marginal cost. indeed, in the LR mon. comp. produces o the declining portion of their ATC curves, so marginal cost is below ATC. thus, for price to equal ATC, price must be above marginal cost.
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how is the markup over marginal cost consistent with free entry and zero exit?
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the product variety externality
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externalities associated with entry:
because consumers get some consumers surplus from the introduction of a new product, the entry of a new firm convey's a positive externality on consumers
because consumers get some consumers surplus from the introduction of a new product, the entry of a new firm convey's a positive externality on consumers
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the business stealing externality
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because other firms lose customers and profits from entry of anew competitor, entry of a new firm imposes a neg. externality on existing firms.
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- because a new firm would offer a product different from those of existing firms
- because firms post a price above marginal cost and therefore are always eager to sell additional units
- because firms post a price above marginal cost and therefore are always eager to sell additional units
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why does a product variety externality arise?
when does a business steering externality arise?
when does a business steering externality arise?
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because all of their products are identical and charge a price that equals marginal cost it can't happen
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why can neither of the two externalities associated with mon. comp. occur with perf. comp. market?
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monopolistic competition
as well as some oligopolies
note: when each firm sells differentiated products and charge prices above marginal cost, each firm has an incentive to advertise to attract more buyers to its product
as well as some oligopolies
note: when each firm sells differentiated products and charge prices above marginal cost, each firm has an incentive to advertise to attract more buyers to its product
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which types of firms can you expect to advertise?
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how differentiated products are across firms
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advertising is all based on..
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advertise
(spend 10-20 percent of revenue advertising)
(spend 10-20 percent of revenue advertising)
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firms that sell highly differentiated products will advertise or not advertise? (such as over the counter drugs, perfumes, soft drinks, razor blades, breakfast cereal, and dog foods)
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advertise (spend very little time advertising)
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firms that sell industrial products will advert time or not advertise? (such as drill presses, and communication satellites)
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NOT advertise
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firms that sell homogeneous products will advertise or not advertise?
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about 2 percent
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for the economy as a whole how much is spent on advertising? including commercials on tv and radio, space in newspapers and magazines, direct mail, the yellow pages, billboards, and the internet
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it might create a desire that might not even exist
and that it impedes competition
and that it impedes competition
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what do critics argue about advertising?
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it provides information to consumers about products
advertising fosters competition
advertising fosters competition
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defenders of advertising say...
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lee benham
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in an article published in the journal of law and economics in 1972, who tested the two view of advertising
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it can be a signal to the consumer about the quality of the product offered.
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the willingness of a firm to spend a large amount of money on advertising conveys what?
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cause customers to perceive differences that do not really exist
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critics argue what over brand names?
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edward chamberlin
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one of the early developers of the theory of monopolistic competition concluded from the brand name argument that brand names create irrationality fostered by advertising, that brand names are bad for the economy. he proposed that the government discourage their use by refusing to enforce the exclusive trademarks that companies use to identify their products
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they create information about the product and its QUALITY
when the quality can not be easily judged in advance purchase (refer back to the McDonalds example)
brand names give firms incentives maintain high quality bc firms have a financial stake in maintaining the reputation of their brand names.
when the quality can not be easily judged in advance purchase (refer back to the McDonalds example)
brand names give firms incentives maintain high quality bc firms have a financial stake in maintaining the reputation of their brand names.
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defenders of brand names argue
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Fixed cost
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Advertising cost and other selling cost are..
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The decision to innovate
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This is based on the marginal cost and the marginal revenue of innovation
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Less elastic
A higher price than before
A higher price than before
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A firm in a monopolistic competition that introduces a new and differentiated product is will temporarily have a _____ demand for its product and is able to charge ______
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Innovate and develops new products
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Because economic profits are eliminated in the long run in monopolistic competition to earn an economic profit firms continuously
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Decreases
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If advertising increases the number of firms in an industry each firms demand
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Can change the quantity produced and lower the average total cost
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For a firm in monopolistic competition selling costs
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