monopolistic competition
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Monopolistic
Competition
Trilok Prajna Prasad K Khushboo Akash
• Large number of Sellers• Selling identical products• Difference in quality, features
etc.
Edward Chamberlin Joan Robinson
1930
Characteristics
• Perfect substitutes• Size, taste, shape• Branding• Advertisement• Promotions
Product Differentiation• Many firms• Stiff competition• CD, Games , computers
Many Sellers or FirmsENTRY EXIT
• Flexibility• Entry & Exit
Free Entry and Free Exit• layoffs, discounts, credit
facilities
No price Competition• Less knowledge• Artificial impression• Non optimal evaluation
Lack of perfect knowledge
In the Short RunSo what happens in the short run when the firm is making profits:
• New firms• Increased products• Reduces demand in the
market.• Demand curves shift to the
left.• profits decline.
In the Short Run
Quantity0
Price
Q
P
AR
MR
ATC
(a) Firm Makes Profit
Averagetotal cost
Profit
MC
In the Short RunSo what happens in the short run when the firm is making losses:
• Exiting markets• Less products • Demand increases• Demand curve shifts
right• Increases profits
In the Short Run
AR
Quantity0
Price
P
Q
Averagetotal cost
(b) Firm Makes Losses
MR
LossesATC
MC
In the Long RunSo what happens in the long run:
• Firms will enter and exit until the firms are making exactly zero economic profits.
Price = Average Total Cost
In the Long Run
Quantity
Price
0
ARMR
ATC
MC
Q
P = ATC
Monopolistic Competition: Welfare of Society
• Deadweight loss• Too much or Too little
entry
Amount produced
Price
P
Q
ATC
MC=S
MR
D
PROFIT
Deadweight loss
Monopolistic Competition: Welfare of Society
Externalities of entry:
• The product-variety Externality
• The business-stealing Externality
Advertising
• Advertisement to attract more buyers• 10-20% revenue on advertising• 2% of revenue on advertising
• Critics• To Manipulate tastes• More different products
Advertising
• Defenders• Information to consumers• Provides great variety of products• Good quality products
Case Study: McDonalds
Competition to McDonald’s
Kentucky's Fried Chicken (KFC)
Burger King Starbucks
Competitive techniques
Competitive techniques
• Remodeling of stores• Replacement of chairs and
glasses• New interior design
Non price competition
• 31000 restaurants and in 119 countries
• Large Dining Areas• Zones for larger groups, eat-and-run
customers, and for those who stay there to rest.
• Flat Screen TVs• Drive through in inside and outside the
restaurants
External competition
Case Study: Apple
• Founded on April 1, 1976• Makers of IPhone, IPad and Ipods• Largest Information technology company by
revenue
Competitors
Differentiated Products
iPhoneiPod
Macbook air
Macintosh iPad
Differentiated Products
• Innovative Products• Differentiated on the basis of its attributes• Quality products
Differentiated Products
Thank You