Economics
Monopolistic Competition in the Long Run
In the long run, monopolistic competition tends towards a situation where firms make zero economic profit. This occurs as new firms enter the market, increasing competition and reducing demand for existing firms' products. As a result, firms adjust their production and pricing strategies to maintain their market share, leading to a state of equilibrium where economic profit is driven to zero.
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12 Key excerpts on "Monopolistic Competition in the Long Run"
eBook - PDF- Tucker, Irvin Tucker(Authors)
- 2016(Publication Date)
- Cengage Learning EMEA(Publisher)
............................................................................................................................................................................................. ............................................................................................................................................................................................... ................................................................................................................................................................................................................. 10-1 THE MONOPOLISTIC COMPETITION MARKET STRUCTURE Economists define monopolistic competition as a market structure characterized by (1) many small sellers, (2) a differentiated product, and (3) easy market entry and exit. Monopolistic competition fits numerous real-world industries. The following is a brief explanation of each characteristic. 10-1a CHARACTERISTICS OF MONOPOLISTIC COMPETITION Many Small Sellers Under monopolistic competition, as under perfect competi-tion, the exact number of firms cannot be stated. But in monopolistic competition, the number of sellers is smaller than in perfect competition. In this market struc-ture, consumers have many different varieties of products from which to choose, and prices are competitive. No single seller has a large enough share of the market to control prices. Ivan ’ s Oyster Bar, described in the chapter preview, is an example of a monopolistic competitor. Ivan assumes that his restaurant can set prices slightly higher or improve service independently without fear that competitors will react by changing their prices or giving better service. Thus, if any single seafood restaurant raises its price, the going market price for seafood dinners increases by a very small amount.
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 - PDF- Steven A. Greenlaw, Timothy Taylor, David Shapiro(Authors)
- 2017(Publication Date)
- Openstax(Publisher)
Figure 10.4 (b) shows the reverse situation, where a monopolistically competitive firm is originally losing money. The adjustment to long-run equilibrium is analogous to the previous example. The economic losses lead to firms exiting, which will result in increased demand for this particular firm, and consequently lower losses. Firms exit up to the point where there are no more losses in this market, for example when the demand curve touches the average cost curve, as in point Z. Monopolistic competitors can make an economic profit or loss in the short run, but in the long run, entry and exit will drive these firms toward a zero economic profit outcome. However, the zero economic profit outcome in monopolistic competition looks different from the zero economic profit outcome in perfect competition in several ways relating both to efficiency and to variety in the market. Monopolistic Competition and Efficiency The long-term result of entry and exit in a perfectly competitive market is that all firms end up selling at the price level determined by the lowest point on the average cost curve. This outcome is why perfect competition displays productive efficiency: goods are produced at the lowest possible average cost. However, in monopolistic competition, the end result of entry and exit is that firms end up with a price that lies on the downward-sloping portion of the average cost curve, not at the very bottom of the AC curve. Thus, monopolistic competition will not be productively efficient. In a perfectly competitive market, each firm produces at a quantity where price is set equal to marginal cost, both in the short and long run. This outcome is why perfect competition displays allocative efficiency: the social benefits of additional production, as measured by the marginal benefit, which is the same as the price, equal the marginal costs to society of that production.
eBook - PDF- Steven A. Greenlaw, Timothy Taylor(Authors)
- 2015(Publication Date)
- Openstax(Publisher)
Figure 10.4 (b) shows the reverse situation, where a monopolistically competitive firm is originally losing money. The adjustment to long-run equilibrium is analogous to the previous example. The economic losses lead to firms exiting, which will result in increased demand for this particular firm, and consequently lower losses. Firms exit up to the point where there are no more losses in this market, for example when the demand curve touches the average cost curve, as in point Z. Monopolistic competitors can make an economic profit or loss in the short run, but in the long run, entry and exit will drive these firms toward a zero economic profit outcome. However, the zero economic profit outcome in monopolistic competition looks different from the zero economic profit outcome in perfect competition in several ways relating both to efficiency and to variety in the market. Monopolistic Competition and Efficiency The long-term result of entry and exit in a perfectly competitive market is that all firms end up selling at the price level determined by the lowest point on the average cost curve. This outcome is why perfect competition displays productive efficiency: goods are being produced at the lowest possible average cost. However, in monopolistic competition, the end result of entry and exit is that firms end up with a price that lies on the downward-sloping portion of the average cost curve, not at the very bottom of the AC curve. Thus, monopolistic competition will not be productively efficient. In a perfectly competitive market, each firm produces at a quantity where price is set equal to marginal cost, both in the short run and in the long run. This outcome is why perfect competition displays allocative efficiency: the social benefits of additional production, as measured by the marginal benefit, which is the same as the price, equal the marginal costs to society of that production.
eBook - PDFMicroeconomics for MBAs
The Economic Way of Thinking for Managers
- Richard B. McKenzie, Dwight R. Lee(Authors)
- 2016(Publication Date)
- Cambridge University Press(Publisher)
(As long as economic profit exists, new firms will continue to enter the market. Eventually the price will fall enough to eliminate economic profit.) 2 Notice that the firm is not producing and pricing at the minimum of its long-run average cost curve, or quantity Q m , as the perfect competitor would (nor did it in the short run). 3 In this sense, the firm is producing below capacity, by Q m – Q mc 2 units. Q mc 1 Q mc 2 Q m MR 2 MR 1 D 2 D 1 LRAC LRMC P mc 1 P mc 2 0 Price per hamburger Quantity of hamburgers Figure 12.2 Monopolistic Competition in the Long Run In the long run, firms seeking profits will enter the monopolistically competitive market, shifting the monopolistic competitor’s demand curve down from D 1 to D 2 and making it more elastic. Equilibrium will be achieved when the firm’s demand curve becomes tangent to the downward sloping portion of the firm’s long-run average cost curve, Q m . At that point, price (shown by the demand curve) no longer exceeds average total cost; the firm is making zero economic profit. Unlike the perfect competitor, this firm is not producing at the minimum of the long-run average total cost curve, Q m . In that sense, it is underproducing, by Q m – Q mc 2 units. This underpro-duction is also reflected in the fact that the price is greater than the marginal revenue. 2 The monopolistic competitor will still have an incentive to stay in business, however. Economic profit, not book profit, falls to zero. Book profit will still be large enough to cover the opportunity cost of capi-tal plus the risk cost of doing business. 3 The perfect competitor produces at the minimum of the average total cost curve because its demand curve is horizontal; therefore, the demand curve’s point of tangency with the average total cost curve is the low point of that curve. 508 Competitive and monopoly market structures A In terms of price and quantity produced, monopolistic competition can never be as efficient as perfect competition.
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 - PDFMicroeconomics
A Global Text
- Judy Whitehead(Author)
- 2020(Publication Date)
- Routledge(Publisher)
Some comparisons may be made. Under Monopolistic Competition, price is higher and output smaller compared to Perfect Competition. The difference depends on how close the slope of the dd curve is to infinite elasticity. Thus social optimum is not reached as it is under perfect competition even though the firm makes zero excess profits. Compared with Monopoly, firms under Monopolistic Competition are likely to have lower profits and lower prices than under Monopoly. Unlike monopoly, where the firm can retain its short-run excess profits into the long-run, the firm under monopolistic competition is affected by entry. This entry and the subsequent adjustment of the firm prevent the firm from having any excess profits in the long-run as is possible under the model of pure monopoly. In addition, whereas under monopoly the firm in its long-run equilibrium position may operate at sub-optimal, optimal or greater than optimal scale, the firm under monopolistic competition must, in the long-run, operate at a sub-optimal scale. Hence, whereas the monopolist’s plant may be under-utilized, over-utilized or used at its designed capacity, the firm under Monopolistic Competition will always under-utilize its short-run plant and operate with excess capacity. 11.5.4 Product differentiation and waste Despite the discussion on what constitutes ‘true’ excess capacity, much attention is still focused on the fact that the long-run equilibrium is to the left of the minimum point of the LAC and SAC curves. Some real world questions are still being asked. These include: • What is the extent of product differentiation in the real world? The empirical question relates to the extent to which product differences allow firms with similar 328 REFLECTIONS ON THE MODEL 11.6 products to have a downward sloping dd curve. It is the slope of this dd curve that determines how high up the left side of the LAC the long-run equilibrium occurs.
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- 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.
eBook - ePubMicroeconomics
A Global Text
- Judy Whitehead(Author)
- 2014(Publication Date)
- Routledge(Publisher)
11 Monopolistic CompetitionThe 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. This work has served to revive flagging interest in the much criticized model. This was buttressed by its further application to issues of increasing returns and intra-industry trade in the area of international economics, associated primarily with the work of Krugman (1979, 1981). Neary (2002) examines the interaction of monopolistic competition and international trade theory.
eBook - ePubEconomics For Dummies
Book + Chapter Quizzes Online
- Sean Masaki Flynn(Author)
- 2023(Publication Date)
- For Dummies(Publisher)
Chapter 7 .) That stands in stark contrast to regulated monopolies, which typically require expensive government bureaucracies to develop and enforce laws and regulations.
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Chapter 9
Oligopoly and Monopolistic Competition: Middle Grounds
IN THIS CHAPTERDeciding whether to compete or collude in an oligopolyExamining why some collusive pacts work and others don’tRegulating firms so they can’t colludeUsing product differentiation to elude perfect competitionLimiting profits in monopolistic competitionThe two most extreme forms that an industry can take are perfect competition (with many small competitive firms) and monopoly (marked by only one firm and no competition). I cover those cases in Chapters 6 and 8 . This chapter concentrates on two interesting intermediate cases: oligopoly and monopolistic competition.An oligopoly is an industry in which there are only a small number of firms — two, three, or a handful. The word itself is Greek for “few sellers.” A diverse group of industries looks like this, including soft drinks and oil production. For instance, Coke and Pepsi dominate the soft drink market, vastly outselling other carbonated beverages. Similarly, just four or five countries produce the majority of the world’s oil.Oligopoly industries are interesting because, depending on specific circumstances, the firms can either compete ruthlessly with each other or unite to behave almost exactly like a monopoly would. This means that in some cases, oligopolies can be left alone because competition ensures that they produce socially optimal output levels; in other cases, government regulation may be needed to prevent them from acting like monopolies and behaving in socially undesirable ways.The second intermediate case is monopolistic competition, a sort of hybrid between perfect competition and monopoly. The key thing that sets firms in this type of industry apart from firms in a perfectly competitive industry is product differentiation
- J.R. Clark(Author)
- 2014(Publication Date)
- Academic Press(Publisher)
In none of these cases would it be possible to use the terms compe-tition or monopoly to distinguish among actual mar-ket situations, which range all the way from those that approach perfect competition on the one hand to those that approach absolute monopoly power on the other. If they are to be practically useful, the terms must be employed in a looser sense. It is possible to describe as competitive those situations in which the conditions requisite to effective or workable competition appear to obtain and as mo-nopolistic those in which there appears to exist an appreciable degree of monopoly power. It is in this loose sense that the terms are here to be employed. The Advantages of Competition Private business, whether it be competitive or monopolistic, seeks to realize a profit. But profit-seeking activity, under the differing conditions of competition and monopoly, employs quite different methods and produces dissimilar results. The prob-able effects of competition and monopoly, in general, may be briefly outlined. Resources are limited in supply. The varieties of goods which might be produced with these resources are many. Economy requires that scarce resources be devoted to the production of those goods which consumers demand and that they be allocated among the nations industries in proportions which corre-spond to that demand. Competition operates to bring about this result. Failure in business curtails the supply of unwanted goods. Freedom of entry into business enlarges the supply of wanted goods. Land, labor, and capital are withdrawn from one field and added to others in response to the changing direction of consumer demand. The mobility char-acteristic of competition thus tends to achieve that allocation of resources which economy requires. Competition serves the consumer. It operates negatively to protect him against extortion. If the quality of the product offered by one producer is low, the quality of that offered by another may be high.
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