Economics
Monopolistic Competition in the Short Run
Monopolistic competition in the short run refers to a market structure where many firms offer similar but slightly differentiated products. In this scenario, firms have some degree of market power, allowing them to set prices above marginal cost. However, entry and exit barriers are low, and firms can earn economic profits or losses in the short run due to product differentiation and advertising.
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12 Key excerpts on "Monopolistic Competition in the Short Run"
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 - ePubMedia Economics
Applying Economics to New and Traditional Media
- Colin Hoskins, Stuart McFadyen, Adam Finn(Authors)
- 2004(Publication Date)
- SAGE Publications, Inc(Publisher)
This market structure is similar to perfect competition, with free entry and exit and many small firms, but in monopolistic competition, the firms produce differentiated products. A monopolistic competitor thus has some control over price because no other firm makes an identical product. This price discretion is very limited, however, because there are many competitors producing close substitutes. A given customer may prefer the XYZ Video Store because of its location, selection, layout, or some other feature. The customer may stay loyal to the store if its nightly rental rate is $0.25 higher than some competitors, but not if it is $0.50 higher. The demand curve for the firm is thus negatively sloped.In monopolistic competition, as in perfect competition, each of the many small firms has such a small market share that a decrease in price by one company will have no significant effect on the sales of any other firm. Thus each monopolistic competitor will make its price decision in the belief that other firms will leave their prices unchanged. This differs from oligopoly, where other firms feel a need to follow the price decreases of a competitor to protect market share. (If you think that the video stores in the area you live in would react to the price cut of a competitor, then video stores in your market are not an example of monopolistic competition but of oligopoly.)Free entry and exit means that only zero economic profits can be earned in long-run equilibrium. 9.1.1 Short-Run Equilibrium Under Monopolistic CompetitionThe short-run equilibrium is the price and output at which MR = SMC. P0 and Q0 for a typical firm are shown in Figure 9.1 . In short-run equilibrium, the firm may make positive, zero, or negative economic profits. To illustrate this, three alternative average total cost curves are drawn under different assumptions about the level of fixed costs. If ATC1 applies, the typical firm enjoys positive economic profits, as AR > ATQ at the profit maximizing price and output. If ATC0 applies, zero economic profits are earned, as AR = ATC0 . If ATC2 applies, negative economic profits are earned, as AR < ATC2 . However, the firm will still produce output Q0 at price P0 , rather than shut down, as long as AR is greater than average variable cost (not shown in Figure 9.1
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 - ePubThe Microeconomics of Wellbeing and Sustainability
Recasting the Economic Process
- Leonardo Becchetti, Luigino Bruni, Stefano Zamagni(Authors)
- 2019(Publication Date)
- Academic Press(Publisher)
This criticism suffers from a weakness, which Chamberlin himself pointed out: it overlooks the fact that differentiation is linked to consumer preferences, who are often willing to pay a higher price in order to have the possibility of choosing from among different varieties of the same type of good. This is as if to say that product diversity comes at a price. Said another way, the possibility of actually being able to make a choice is a positive argument in consumers' utility functions, who show that they increasingly appreciate its value. Regarding the comparison with a monopoly, note that over the long run extra profits are zero in both perfect and monopolistic competition. A monopoly enterprise, however, can earn extra profits even over the long run as long as it is able to maintain the entry barriers it set up for its protection. Finally, we observe that resources are inefficiently allocated in both a monopoly and in monopolistic competition.6.5. An oligopolistic market
6.5.1. Its distinctive characteristics
An oligopoly is a market structure in which several companies operate, but none of them have a negligible market share (as happens in perfect competition). Every oligopolistic enterprise is thus able to exercise a certain influence on the relevant price and/or quantity variables and is aware that other companies operating in the sector can, by their decisions, do the same. The distinctive nature of an oligopolistic structure is that there is strategic interaction between companies; such interaction is absent in a monopoly and in perfect competition, in which companies, taking price as a given, behave atomistically.Consider a duopoly, or a market in which there are only two suppliers and multiple buyers. In addition to company A , another company B produces and sells an identical product as its rival. Suppose the two companies know the behavior of the good's consumers, summarized by the demand function p=f (q ); p indicates the price and q indicates the total output, which is equal to the sum of qAand qB, representing the production levels of the two companies A and B respectively. For the sake of simplicity, assume that production costs are zero. If each company independently chooses its output level to maximize its profits (indicated by π ), then firm A chooses qAto maximize πA=pqA=f (qA+qB)qA. As we see, πAalso depends on qB; that is, A 's optimal output level choice is no longer independent of the output level simultaneously chosen by the other company, as it is in perfect competition. Thus there is no demand curve for an individual company in an oligopoly; the quantity of product an oligopolist can sell at a certain price depends on what its rivals do. This is why an oligopolist can never know with certainty
eBook - PDF- Steven A. Greenlaw, David Shapiro, Daniel MacDonald(Authors)
- 2022(Publication Date)
- Openstax(Publisher)
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. In a monopolistically competitive market, the rule for maximizing profit is to set MR = MC—and price is higher than marginal revenue, not equal to it because the demand curve is downward sloping.
eBook - PDFMicroeconomics
Theory and Applications
- Edgar K. Browning, Mark A. Zupan(Authors)
- 2019(Publication Date)
- Wiley(Publisher)
CHAPTER 13 332 Monopolistic Competition and Oligopoly Memorable Quote “People of the same trade seldom meet together, even for merriment or diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices. It is impossible indeed to prevent such meetings, by any law which either could be executed, or would be consistent with liberty and justice. But though the law cannot hinder people of the same trade from sometimes assembling together, it ought to do nothing to facilitate such assemblies; much less to render them necessary.” —Adam Smith, Wealth of Nations, Book I, Chapter X Competition and pure monopoly lie at opposite ends of the market spectrum. Competi- tion is characterized by many firms, unrestricted entry, and a homogeneous product, while a pure monopoly is the sole producer of a product. Yet many real-world market structures seem to be incompatible with either the competitive or the pure monopoly model. How do we analyze a market situation, then, where there are a dozen similar but slightly different brands of aspirin or only three companies supplying breakfast cereals? Falling between competition and pure monopoly are two other types of market structure: monopolistic competition and oligopoly. Monopolistic competition is closer to competition; it has many firms and unrestricted entry, like the competitive model, but the firms’ products are differentiated. Fast-food chains, for example, may be viewed as monopolistic competi- tors. They supply the same general product, fast food, but one chain’s specialty burger, say the Big Mac, is “different” from another’s, such as the Whopper. Oligopoly is more like pure monopoly; it is characterized by a small number of large firms producing either a homoge- neous product like steel or a differentiated product like cars.
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 - PDFEconomics
Theory and Practice
- Patrick J. Welch, Gerry F. Welch(Authors)
- 2016(Publication Date)
- Wiley(Publisher)
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. Control over Price With a large number of firms selling identical products, the individual purely competitive firm has no control over the price it can get for its prod- uct. In monopolistic competition there is also a large number of sellers, but because the sellers’ products are differentiated, buyers do not view the product of one seller as a perfect substitute for the product of another. For this reason, when a monopolistically competitive firm raises its price, it will lose some, but not all, of its buyers. Some buy- ers will continue to purchase the product from the firm at a higher price because they see the firm’s product as different from and preferable to those of its competitors. Thus, product differentiation allows a firm to carve out a little niche of its own within the larger market. However, even with product differentiation, there is a limit to the amount of control a monopolistically competitive seller has over price. Since many other firms produce similar products, a firm that raises its price too much risks losing many of its Monopolistic Competition Market structure characterized by a large number of sellers with differentiated products and fairly easy entry and exit. Differentiated Products Products of competing firms are different and recognized as such by buyers. Monopolistic Competition 343 buyers. Some buyers may be willing to pay a little extra for better service or a distinc- tive style, but if they have to pay a lot more, the alternatives become more attractive.
eBook - ePubEconomics For Dummies
Book + Chapter Quizzes Online
- Sean Masaki Flynn(Author)
- 2023(Publication Date)
- For Dummies(Publisher)
Chapter 7 ). This section provides an overview of monopolistic competition.Benefiting from product differentiation
Like competitive firms operating in free markets, industries featuring monopolistic competition have lots of firms competing against each other. But unlike competitive free markets where all the firms in an industry sell an identical product, in monopolistic competition each firm’s product is at least slightly different.Think of the market for gasoline. Any large city has dozens, if not hundreds, of gas stations — all selling gasoline that’s pretty much the same. But if you look at each gas station with a little wider scope, you notice that each one sells a product that’s at least slightly different from the product its competitors sell. For instance, some stations have mini-marts, and others have car washes or provide fuel with special additives designed to improve engine performance. And crucially, each gas station is clearly differentiated from all the others because it has a unique location — something that’s important to people who live nearby or are desperate because their car is running on its last fumes.Economists use the term product differentiation to describe the things that make each firm’s product a different from its competitors’ products. The overall result of these differences is that they decrease the intensity of competition at least a little bit. Your local gas station, for instance, may be able to get away with charging you a few cents more per gallon than its competitors if it has nice facilities and the next-closest competitor is several miles away.On the other hand, there’s still a lot of competitive pressure in the industry. Although your local station may be able to use its unique characteristics to get away with charging you a little more, it couldn’t charge you a lot more — if it tried to do that, you’d take your business to one of its competitors.
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)
Problems with monopoly theory (30 minutes) 48. The lemon problem (19 minutes) The bottom line The key takeaways from Chapter 12 are the following: 1 Firms in monopolistically competitive and oligopoly markets will follow the same production rule for profit maximization that perfect competitors and pure monopolies follow: they will produce where marginal cost and marginal revenue are equal. 2 Monopolistic competitors may earn zero economic profits in the long run, but they will not produce at the minimum of their long-run average cost curve. 3 The downward sloping demand faced by a dominant producer in a market can be derived from the gaps between the quantity demanded and supplied at various prices by all other smaller producers. 4 The profit incentive firms have to form cartels in their markets is a cause for the cartels’ failures, as members cheat on cartel production and pricing agreements. 5 At times, producers demand government regulation because such regulation can enable the producers to restrict their aggregate production and charge above-competitive prices. Firm strategy under imperfectly competitive market conditions 547 6 Asset bubbles do happen, as they have happened. Economists have explained asset bubbles with theories founded on both rational and irrational decision making. 7 Although the analysis of imperfect competition tells us something about the working of real-world markets, it does not answer all the questions economists have asked. The theo-ries presented here have by no means done a perfect job of predicting the consequences of imperfect competition. Thus our conclusions regarding the pricing and production behav-ior of firms in monopolistically competitive and oligopolistic markets are tentative at best. 8 Economists seeking to make solid, empirically verifiable predictions about market behavior rely almost exclusively on supply and demand and monopoly models.
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.
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