Monopolistic competition Is Starbucks coffee really different from

Monopolistic competition Is Starbuck’s coffee really different from any other?

Monopolistic competition n n A monopolistically competitive producer is one amongst many producers of goods or services that are differentiated. The industry has the structure of monopolistic competition. ¨ A differentiated product is slightly different from the goods or services offered by other close competitors. n ¨ ¨

Elasticity of Demand Perfect Competition: n The demand curve is a horizontal line (perfectly elastic) ¨ ¨ Monopoly: n Demand curve is industry demand (downward sloping) n Much less elastic than under perfect competition ¨

Elasticity of Demand Monopolistic Competition: n Only producer of a “unique” product n Unlike monopoly there are many close substitutes n How will the elasticity of demand compare? P D (competition) D (monopoly) Q same units

Marginal Revenue Curve n What will the monopolistic competitors marginal revenue curve look like? n P D Q

Profit Maximization n The monopolistic competitor also faces perfect competition in input markets ¨ P Thus, cost curves are similar to competition and monopoly n MC ATC n n D (AR) Q MR What quantity and price should the firm choose?

Long-Run Equilibrium n Unlike under monopoly firms can enter or exit n n This results in a shift in demand for the goods produced by existing firms in the industry ¨ Example, ¨ ¨ short-run profits

Profits and entry n n With profits other firms enter the industry (in the long run). Demand for each producer’s output falls. n MC P ATC P 1 ¨ Q 1 Q

Losses and exit n n n With losses existing firms leave the industry (in the long run). Demand for each producer’s output increases. Demand rises until economic profits are zero. ¨ MC P ATC P 1 D When the demand curve is tangent to ATC MR Q 1 Q

Monopolistic vs perfect competition MC P n ATC Monopolistic competition: ¨ n PMC n ¨ D n MR ¨ ¨ n QMC Q MC P Perfect competition: ATC ¨ n PC D ¨ ¨ QC Q

The assessment n When there is monopolistic competition, the unregulated “market” outcome creates some inefficiency. ¨ n Compared to perfect competition it may or may not be “better”: ¨

That’s it, folks