Economics
Monopolistic Competition
Monopolistic competition is a market structure characterized by a large number of firms selling similar but not identical products. Each firm has some degree of market power due to product differentiation, allowing them to set prices. Entry and exit are relatively easy, and firms compete based on product differentiation, advertising, and branding. This market structure combines elements of both monopoly and perfect competition.
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9 Key excerpts on "Monopolistic Competition"
No longer available |Learn more- (Author)
- 2014(Publication Date)
- Orange Apple(Publisher)
Unlike perfect competition, the firm maintains spare capacity. Models of Monopolistic Competition are often used to model industries. Textbook examples of industries with market structures similar to Monopolistic Competition include restaurants, cereal, clothing, shoes, and service industries in large cities. The founding father of the theory of Monopolistic Competition was Edward Hastings Chamberlin in his pioneering book on the subject Theory of Monopolistic Competition (1933). Joan Robinson also receives credit as an early pioneer on the concept. Monopolistically competitive markets have the following characteristics: ____________________ WORLD TECHNOLOGIES ____________________ • There are many producers and many consumers in a given market, and no business has total control over the market price. • Consumers perceive that there are non-price differences among the competitors' products. • There are few barriers to entry and exit. • Producers have a degree of control over price. The long-run characteristics of a monopolistically competitive market are almost the same as in perfect competition, with the exception of Monopolistic Competition having heterogeneous products, and that Monopolistic Competition involves a great deal of non-price competition (based on subtle product differentiation). A firm making profits in the short run will break even in the long run because demand will decrease and average total cost will increase. This means in the long run, a monopolistically competitive firm will make zero economic profit. This gives the amount of influence over the market; because of brand loyalty, it can raise its prices without losing all of its customers. This means that an individual firm's demand curve is downward sloping, in contrast to perfect competition, which has a perfectly elastic demand schedule.
eBook - ePub- Noritsugu Nakanishi(Author)
- 2018(Publication Date)
- WSPC(Publisher)
Chapter 6Monopolistic Competition
We develop models incorporating Monopolistic Competition, which are characterized by the increasing-returns-to-scale technology and product differentiation. The monopolistically competitive models have been first introduced to international trade theory in order to explain so-called intra-industry trade — the phenomenon that goods or services within the same category of a certain classification are exchanged internationally. Since then, they have been applied to various topics that are difficult (sometimes, impossible) to explain within the framework of classical theories of comparative advantage based on perfect competition.Earlier models of Monopolistic Competition heavily rely on the assumption of technological symmetry among firms.1 Stimulated by the recent empirical findings that firms even within the same industry have different characteristics and diversified productivities, the monopolistically competitive models have been modified so as to suitably incorporate such firm heterogeneity. Moreover, the development of monopolistically competitive models has brought about a renewal or a revival of a branch of economics that examines geographic characteristics of an economy such as locational decisions and distribution of economic agents (firms and/or workers), regional concentration of industries, formation of cities, and others. This is now known as the New Economic Geography (NEG) or Spatial Economics.6.1Product Differentiation
Suppose that there are two goods of which basic functions are the same. When consumers can distinguish one good from the other by such non-price aspects as qualities, colors, trademarks, logos, brand names, packaging, after-sales services, and so forth, we say that these goods are differentiated. When goods are distinguished by their qualities (from low to high), this is called vertical differentiation; other cases are called horizontal differentiation
eBook - PDFEconomics
Theory and Practice
- Patrick J. Welch, Gerry F. Welch(Authors)
- 2016(Publication Date)
- Wiley(Publisher)
A monopolistically competitive market has ♦ a large number of sellers—not as many as in pure competition, but a large number nonetheless; ♦ differentiated products—buyers can distinguish among the products of different sellers; and ♦ fairly easy entry into and exit from the market. We frequently find ourselves as buyers in monopolistically competitive markets: coffee shops, restaurants, mall clothing stores, and other retailers where a large num- ber of small shops compete with one another. In these markets each seller’s product is somewhat different: It might be location, parking, service, image, or a variety of other things. Think about your local coffee shops, where the quality of the coffee used to make a latte, or even the crowd that frequents the shop, differentiates one place from another. It is relatively easy to open a small store or shop. A place can be leased; no highly trained workers are needed; and there are minimal capital equipment require- ments. The small cupcake shops that are springing up all over the country exemplify these characteristics. Another slightly different example of a monopolistically competitive market is the labor market for college graduates with a particular major, such as accounting. Each year a large number of accounting majors graduate from colleges and universi- ties. Each of these graduates is unique in terms of grades, background, experience, courses completed, college attended, and initiative. Entry into this market is relatively easy: The major expenditure is the cost of a college degree. Behavior of a Firm in Monopolistic Competition Because of differences in the characteristics of monopolistically competitive and purely competitive markets, there are differences in the behavior of firms in these structures. Notably, unlike pure competitors, monopolistic competitors have some control over the prices they receive for their products, and they engage in nonprice competition.
No longer available |Learn more- (Author)
- 2014(Publication Date)
- University Publications(Publisher)
A monopoly is a market structure in which a single supplier produces and sells the product. If there is a single seller in a certain industry and there are no close substitutes for the goods being produced, then the market structure is that of a pure monopoly. Sometimes, there are many sellers in an industry and/or there exist many close substitutes for the goods being produced, but nevertheless firms retain some market power. This is called Monopolistic Competition, whereas in oligopoly the main theoretical framework revolves around firm's strategic interactions. In general, the main results from this theory compare price-fixing methods across market structures, analyse the impact of a certain structure on welfare, and play with different variations of technological/demand assumptions in order to assess its consequences on the abstract model of society. Most economic textbooks follow the practice of carefully explaining the perfect competition model, only because of its usefulness to understand departures from it (the so called imperfect competition models). The boundaries of what constitutes a market and what doesn't is a relevant distinction to make in economic analysis. In a general equilibrium context, a good is a specific concept entangling geographical and time-related characteristics ( grapes sold in October 2009 in Moscow is a different good from grapes sold in October 2009 in New York ). Most studies of market structure relax a little their definition of a good, allowing for more flexibility at the identification of substitute-goods. Therefore, one can find an economic analysis of the market of grapes in Russia , for example, which is not a market in the strict sense of general equilibrium theory. Characteristics • Single seller: In a monopoly there is one seller of the good who produces all the output. Therefore, the whole market is being served by a single firm, and for practical purposes, the firm is the same as the industry.
eBook - PDF- Steven A. Greenlaw, Timothy Taylor, David Shapiro(Authors)
- 2017(Publication Date)
- Openstax(Publisher)
Most of the markets that consumers encounter at the retail level are monopolistically competitive. The other type of imperfectly competitive market is oligopoly. Oligopolistic markets are those which a small number of firms dominate. Commercial aircraft provides a good example: Boeing and Airbus each produce slightly less than 50% of the large commercial aircraft in the world. Another example is the U.S. soft drink industry, which Coca-Cola and Pepsi dominate. We characterize oligopolies by high barriers to entry with firms choosing output, pricing, and other decisions strategically based on the decisions of the other firms in the market. In this chapter, we first explore how monopolistically competitive firms will choose their profit-maximizing level of output. We will then discuss oligopolistic firms, which face two conflicting temptations: to collaborate as if they were a single monopoly, or to individually compete to gain profits by expanding output levels and cutting prices. Oligopolistic markets and firms can also take on elements of monopoly and of perfect competition. 10.1 | Monopolistic Competition By the end of this section, you will be able to: • Explain the significance of differentiated products • Describe how a monopolistic competitor chooses price and quantity • Discuss entry, exit, and efficiency as they pertain to Monopolistic Competition • Analyze how advertising can impact Monopolistic Competition Monopolistic Competition involves many firms competing against each other, but selling products that are distinctive in some way. Examples include stores that sell different styles of clothing; restaurants or grocery stores that sell a variety of food; and even products like golf balls or beer that may be at least somewhat similar but differ in public perception because of advertising and brand names. There are over 600,000 restaurants in the United States.
eBook - PDF- Steven A. Greenlaw, David Shapiro, Daniel MacDonald(Authors)
- 2022(Publication Date)
- Openstax(Publisher)
Most of the markets that consumers encounter at the retail level are monopolistically competitive. The other type of imperfectly competitive market is oligopoly. Oligopolistic markets are those which a small number of firms dominate. Commercial aircraft provides a good example: Boeing and Airbus each produce slightly less than 50% of the large commercial aircraft in the world. Another example is the U.S. soft drink industry, which Coca-Cola and Pepsi dominate. We characterize oligopolies by high barriers to entry with firms choosing output, pricing, and other decisions strategically based on the decisions of the other firms in the market. In this chapter, we first explore how monopolistically competitive firms will choose their profit- maximizing level of output. We will then discuss oligopolistic firms, which face two conflicting temptations: to collaborate as if they were a single monopoly, or to individually compete to gain profits by expanding output levels and cutting prices. Oligopolistic markets and firms can also take on elements of monopoly and of perfect competition. 10.1 Monopolistic Competition LEARNING OBJECTIVES By the end of this section, you will be able to: • Explain the significance of differentiated products • Describe how a monopolistic competitor chooses price and quantity • Discuss entry, exit, and efficiency as they pertain to Monopolistic Competition • Analyze how advertising can impact Monopolistic Competition Monopolistic Competition involves many firms competing against each other, but selling products that are distinctive in some way. Examples include stores that sell different styles of clothing; restaurants or grocery stores that sell a variety of food; and even products like golf balls or beer that may be at least somewhat similar but differ in public perception because of advertising and brand names. There are over 600,000 restaurants in the United States.
eBook - PDFMicroeconomics
A Global Text
- Judy Whitehead(Author)
- 2020(Publication Date)
- Routledge(Publisher)
11 Monopolistic Competition The Chamberlin Model: Short and Long-run equilibrium; Critique of the Model. The market structure of Monopolistic Competition is situated between those of perfect competition and monopoly. This market structure gains increasing relevance as national markets become more integrated into the global market. Many firms that previously operated as monopolies in their individual domestic markets experience a greater level of competition when lowered trade barriers expose them to the global market. Moreover, the increasing relevance of this model of market structure may be gauged from the efforts made to incorporate increasing returns to scale and differentiated products (central features of Monopolistic Competition) into modern International Trade theory. Until around the 1930s, perfect competition and monopoly were the principal market structures considered in Microeconomic theory. Around that time, a number of economists including Edward Chamberlin (1933), Joan Robinson (1933), and Piero Sraffa (1926), were raising questions about the general applicability of the older models based mainly on empirical grounds and were proposing new models of market structure which lie between the two polar extremes of perfect competition and monopoly. These new approaches, sometimes dubbed the imperfect competition (or Monopolistic Competition) revolution in microeconomic theory, saw the emergence of the model of Monopolistic Competition, a model largely attributed to Chamberlin (1933), and of models of oligopoly. Although oligopoly (duopoly) models date back to the nineteenth century (1830s), it was not until around the 1930s that they began to attract more widespread attention and became more popular as newer models were developed. Monopolistic Competition received more attention in the mid-1970s with the Dixit– Stiglitz (1977) reformulation that is sometimes referred to as the second Monopolistic Competition revolution.
eBook - PDF- J. R. Clark(Author)
- 2014(Publication Date)
- Academic Press(Publisher)
CHAPTER FOURTEEN Monopolistic Competition and Oligopoly SECTION ONE True or False Seli-Test 1. Monopolistic competitors face a highly elastic demand curve. Like monopolists, they must reduce price to expand sales and therefore their marginal revenue curve lies below their demand curve. 2. The profit-maximizing level of output for the monopolistic competitor occurs at the point where MR = MC. The firm will then sell this output to the consumer at a price determined by the height of the market demand curve. The market price will exceed the firm's marginal cost. 3. Much like firms in purely competitive markets, monopolistic competitors cannot earn long-run economic profits because of low barriers to entry. 4. A monopolistically competitive market is characterized by many sellers producing an identical product and low barriers to market entry. 129 130 Chapter Fourteen SECTION TWO Multiple Choice Self-Test 1. The absence of barriers to entry in both monopolistically competitive and purely competitive markets implies that: a. firms will be free to enter and exit the industry in search of economic profits b. in the long run economic profits will not exist c. short-run economic profits will encourage entry, expand supply, and therefore eliminate economic profits in the long run. d. All of the above are correct. 2. In the case of monopolistically competitive firms: a. marginal revenue will be equal to price at the profit-maximizing level of output b. marginal revenue will be equal to marginal cost in the short run at the profit-maximizing level of output c. marginal cost will be equal to price at the profit-maximizing level of output d. price will decline to average variable cost at the profit-maximizing level of output. 3. The major reasons for the high price elasticity of the demand curve faced by monopolistic competitors are: a. low barriers to entry and firms that produce many good substitutes b. strong **brand name allegiance*' by consumers and poor substitutes 5.
- Takashi Suzuki(Author)
- 2009(Publication Date)
- World Scientific(Publisher)
E CONOMIES WITH M ONOPOLISTICALLY C OMPETITIVE F IRMS C h a p t e r 6 6.1. MONOPOLISTICALLY COMPETITIVE MARKETS A remarkable aspect of the development of the actual markets is that on one hand, the number of consumers has grown rapidly, which is perhaps the meaning of the “extension of the markets”, but on the other hand, the production activities have been concentrated on more and more small numbers of firms. In other words, as the markets have become large in the sense as given in Chap. 3, they have become more monopolistic. Lenin wrote in 1917 that: “The enormous growth of the industry and remarkably rapid process of concentration of production in ever-larger enterprises represent one of the most characteristic feature of capitalism. Modern censuses of production give very complete and exact data on this process. In Germany, for example, for every 1,000 industrial enterprises, large enterprises, i.e., those employing more than 50 workers, numbered three in 1882, six in 1895, and nine in 1907; and out of every 100 workers employed, this group of enterprises employed 22, 30 and 37, respectively. Concentra-tion of production, however, is much more intense than the concentration of workers, since labour in the large enterprises is much more productive. This is shown by the figures available on steam engines and electric motors. If we take what in Germany is called industry in the broad sense of the term, that is, including commerce, transport, etc., we get the following picture: large-scale enterprises 30,588 out of a total of 3,265,623, that is to say, 0.9 per cent. These large-scale enterprises employ 5,700,000 workers out of a total of 14,400,000, that is 39.4 per cent; they use 6,660,000 steam horse power out of a total of 8,800,000, that is, 75.3 per cent and 1,200,000 kilo watts of electricity out of a total of 1,500,000, that is, 77.2 per cent.
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