Chp 13 - monopolistic competition Flashcards
(42 cards)
what is a monopolistic competition?
a market structure in which:
1. a large number of firms compete
2. each firm produces a differentiated product
3. firms compete on product quality, price and marketing
4. firms are free to enter and exit the industry
what’s the 3 implications for each individual firm in the industry in a monopolistic competition
- small market share - each firm supplies a small part of the total industry –> thus each firm has only limited power to influence the price of tis product as firm’s price can deviate from the average price of other firms by a relatively small amount
- ignore other firm - a firm must be sensitive to the average market price of the product, but the firm does not pay attention to any one individual competitor –> all firms are relatively small so no one firm can dictate market conditions and the actions of no one firm directly affect the actions of the other firms
- collusion impossible - firms would like to be able to conspire to fix a higher price (collusion) but bc the number of firms is large, coordination is difficult and collusion is not possible
define product differentiation
a firm makes a product that is slightly different from the product of competing firms and is a close substitute for the products of the other firms
product differentiation allows firms to compete with other firms in which 3 areas? and how?
- quality - physical attributes that make it different from the products of other firms (design, reliability, services provided to buyer, buyer’s ease of access to the product)
- price - firms can set its price and output - tradeoff between price and product’s quality
- marketing - firm must market its product - advertising + packaging
does a firm in monopolistic competition make economic profit in the long-run? why?
they cannot make an economic profit in the long-run bc in the long-run firms neither enter nor leave the industry (as monopolistic competition have no barriers to prevent new firms from entering the industry in the long-run)
how of economists measure whether a market is sufficiently competitive to be classified as monopolistic competition
measure of concentration
what are the 2 main measures of concentration
- the 4-firm concentration ratio
- the Herfindahl-Hirschman Index
define the 4-firm concentration ratio? what does a low or high concentration ratio mean?
the percentage of the total revenue accounting for by the 4 largest firms in an industry - main measure used to assess market structure
a low concentration ration indicates a higher degree of competition and vice versa
what does a concentration ratio of 60% or more in the 4-firm concentration ration mean?
60% - a market that is highly concentrated and dominated by a few firms
less than 60% - an indication of a competitive market
define the herfindahl hirschman index (HHI)
the square of the percentage market share of each firm summed over the largest 50 firms in a market
in perfect competition, herfindahl-hirschman is ___
small
what’s the HHI value of a monopoly
10,000 (100^2 * 1)
when is a market regarded as being competitive in HHI values?
1,500-2,500
what’s the market for an HHI that exceeds 2,500
being concentrated and uncompetitive
describe an oligopoly in term is HHI and concentration ratio
a market with a high concentration ration and high HHI
what are the limitations of a concentration measure? explain
- geographical scope of the market - concentration measures take a national view of the market - many goods are sold in a national market but some are sold in a regional or global market
- barriers to entry and firm turnover - some market are highly concentration (entry = easy and large firm turnover rate) and a market with a few firms might be competitive because of potential entry
- market and industry correspondence - markets do not always correspond closely to industries bc 1. markets are often narrower than industries 2. most firms make several products
how does a firm in monopolistic competition look at deciding profit-maximizing/loss minimization and quantity?
where MC = MR, and the price of ATC and demand curve correlate - similar to a single priced monopoly
produces the quantity at which MR = MC and then charges the price that buyers are willing to pay for that quantity as determined by the demand curve
what happens in the long-run for firms in monopolistic competition
they make zero economic profit
what are the 2 difference between monopolistic competition and perfect competition
- excess capacity
- markup
when does the firm have excess capacity
if the firm produces less than its efficient scale - the quantity at which ATC is at minimum
fill in the blank: ATC is the lowest possible cost only in _______ competition
perfect
what is a firm’s markup
the amount by which price exceeds marginal cost
what does the markup between price and marginal cost in monopolistic competition arise from?
product differentiation
describe the relationship between benefit and value
the benefit of a good would be less if there’s less variety since people value variety but variety is costly
