monopolistic competition Flashcards
(19 cards)
What is Monopolistic Competition
market structure which combines elements of a monopoly and competitive market.
characteristics of monopolistic competition
-many sellers in a monopolistically competitive market
-goods and services are slightly differentiated
-there are low barriers to entry and exit for firms-firms can enter when snp is made and firms can leave when they make a loss
-Firms are price makers due to diffetntiated goods
Examples of Monopolistically competitive markets
Restaurants – restaurants compete on quality of food as much as price. Product differentiation is a key element of the business. There are relatively low barriers to entry in setting up a new restaurant.
Hairdressers. A service which will give firms a reputation for the quality of their hair-cutting.
Clothing. Designer label clothes are about the brand and product differentiation
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V programmes – globalisation has increased the diversity of tv programmes from networks around the world. Consumers can choose between domestic channels but also imports from other countries and new services, such as Netflix.
monopolistic competition in the short run
Monopolistic Competition = Price Making Power à Slightly Differentiated Goods à Set the price à make SNP in SR. Price > MC. In terms of price, consumer surplus falls à However, consumers actually do not mind having some consumer surplus eroded to access a unique/high quality product in the case of monopolistic competition
monopolistic competition in the long run
Demand for individual firms will keep shifting left until there is normal profit made à competitors enter the market and copy products
· Price = AC = Normal Profit
Supernormal profits attract new suppliers with differentiated products into the market. à Dilutes the market share of existing products, causing an inward shift of AR and MR à Entering a market with similar products makes it easier for consumers to switch.
limitations of monopolistically competitive market model
If a firm has strong brand loyalty and product differentiation – this itself becomes a barrier to entry. A new firm can’t easily capture the brand loyalty.
Many industries, we may describe as monopolistically competitive are very profitable, so the assumption of normal profits is too simplistic
Monopolistic Competition X-effiicient
X-efficiency. This is possible as the firm does face competitive pressures to cut cost and provide better products.
Monopolistic Competition Allocative Efficiencies
A.E-Firms produce outcomes that are allocatively ineffient . Consumers charged P>MC at profit maximising level of output. At this point of prod resources not allocated according to consumer demand with comusers getting a lower quantity than they desire . Consumer choice is restricted and prices are high reducing consumer surplus
Monopolistic Comp Efficiency Productive efficiency
Productively Inefficient
do not produce at minimum point on ac curve thereby forego EOS
ouput could be increased with lower ac but it does not correspond with profit max
consumerssuffer higher prices and lower consumper surplus than eos being exploited
Dynamic efficiency Monopolistic competition
Dynamic efficiency is not being achieved in the long run.THis is because snp is not being made in the long run thus restricitng a monopolstically competitve firms ability to re invest
over time consumer lose out of innovative products reducing choice and future price fall
Allocative inefficiency evaluation in monopolistic competition
consumers arew illing to pay slightly higher prices than mc as they face greater choice preffering this than product homgeneity
price are lower due to similar if not identical goods thereby consumer service and product quality likelt to be better due to no pric comp drive that exists.
productive inefficiency in monopolstic comp eval
this does not means ignifcant higher prices than perfect comp and loss of efficnechy is not as signifcant as that in monopoly
dynamic efficiency eval for monopolistic competition
firms may be forced to re invest short run snp or even erod normal profits in order to stay ahead of rivals and compete in a competitive way.
reality of monopolistic competition
produces the most inefficinet outcomes the reality is actually the opposite. it cnan be argued that monopolisti ccomp si the best market structure for maximising social welfare meeting the needs and wants of consumers that demand variety.
how does product differnetiation influence pricing power in monopolistic competition
product differentiation gives firms some pricing power because consumers may be willing to pay more for a product they perceive as better or more suited to their preferences
explain how the equillibirum position of a firm in monopolistic competititon changes from the short run to thr long run
in the short run firms may set prices above ac and earn snp but in the long run entry of nre firms shifts the demand curve lefwards until it is tangent to the average cost curve
General Monopolistic Comp
some firms may continue to make snp: some firms will better at brand diffferentiation and find their nice e.g balnk street coffee
low barriers to entry:depend on the elvel of brand loyalty and consumer inertia
application of monopolistic competition for differentiated goods providing higher prices
firm like pret a manager may use advertising to creat a distinct brand image around fresh organic food.This sidderentiation allows it to charge higher price than independent cafes supporting short un snp.
Dubai’s reputation for luxury and exclusivity. Unlike traditional chocolates from Europe, Dubai’s offerings often incorporate exotic flavors, rare ingredients, and innovative designs.
application for non price factors within monopolistic comp
brands like SuperDry may continue charging higher prices due to branding and advertising despite the availability of cheaper substitiutes
