Chapter 13 Flashcards
Monopolistic competition (36 cards)
Monopolistic competition
A market structure in which; large number of firms compete, each firm produces a differentiated product, firms compete on product quantity, price and marketing, and firms are free to enter and exit the industry.
What do firms supply in monopolistic competition?
Each firm supplies a small part of the total industry output.
What kind of influence does the firm have in a monopolistically competitive market?
Each firm has limited power to influence the price of its product.
Avg. price of other firms.
What do monopolistically competitive firms pay attention to?
To the average market price but not to any individual competitor.
Collusion
The desire that firms have in a monopolistic competitive market in which they can conspire to fix a higher price, but it is illegal to do so.
Why is it illegal to collude with other firms to fix higher prices?
The number of firms in monopolistic competition is large, and coordination (collective agreement) would be difficult.
When do firms practice product differentiation?
If it makes a product that differs slightly from the products of competing firms (close but not perfect substitute).
Product quality
Physical attributes that make product different from the products of other firms; quality runs on a spectrum from high to low.
What kind of slope does a monopolistic market face, and why?
Because of product differentiation, monopolistic competitive industries face a downward - sloping demand curve.
How do monopolistic competitive firms determine prices?
A firm can set price and output, but there is a tradeoff between the product’s quality and price.
What do firms need to focus on because of product differentiation?
They need to market their products; two forms: advertising and packaging.
Does a monopolistic competitive market enforce barriers? What is the result of not doing so?
No barriers, therefore, no economic profit in the long run (TR).
The four firm concentration ratios (check notebook for steps on finding the answer)
The percentage of the value of sales accounted for by the four largest firms in the industry.
Side note: low ration (60% or less) = high comp and vice versa.
HHI (check notebook for steps for finding the answer)
The square of the percentage market share of each firm is summed over the largest 50 firms in a market.
Side note: market with high ratio (2,500 or more): oligopoly (a market structure in which: a natural monopoly or legal barriers prevent the entry of a new firm, usually two or more firms, or a small number of firms compete).
Limitations of measures of concentration
- The geographical score of the market (this index can either be too broad or too small to capture the score on a geographical scale)
- Barriers to enter and firm turnover (cannot capture the market’s dynamics and movement since it is too vague to do so)
- Market and industry correspondence ( some markets do not correspond to the category its put in when being calculated, like some markets fit into more than one category).
Short-run equilibrium
A firm in monopolistic competition makes its output and price just like a monopoly firm does.
On a graph, the demand, D, tells us the quantity of the product demanded at each price, given the prices of opposing products.
Can a firm make enough profit from the prices they set for each product?
A firm might face a level of demand for its product that is too low for it to make an economic profit. (like Target Canada)
What happens to a firm when new firms enter the market?
This entry causes the older firm’s demand to decrease, and the demand curve shifts leftward.
Proft-maximizing quantity and priced decreases.
What happens when firms make zero economic profits?
There is no incentive for new firms to enter.
Demand is also so low relative to costs, which forces exit.
Excess capacity
A firm produces below its efficient scale.
Where is the minimum ATC located?
The quantity at the bottom of the U shaped ATC curve.
How do monopolistic firms sell more?
They sell more by cutting prices, but they would incur an economic loss.
Markup, and how is that related to monopolistic firms?
The amount by which price exceeds marginal cost (MC).
Buyers pay a higher price in monopolistic markets, but firms also pay more than marginal cost.
Resources are efficient when…
MSB = MSC, and price = MSB, and marginal cost = MSC.
