Majoutko Alexei IFF20-3. Chapter 16

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Majoutko Alexei IFF20-3

Table of Contents

Chapter 16. 1

Chapter 17. 3

Chapter 18. 7

Chapter 19. 9

Chapter 20. 11

Chapter 21. 12

Chapter 16

There are numerous competing producers in monopolistic competition, each with a differentiated product and, in the long term, free entry and exit.

Product differentiation may occur in both oligopolies and monopolistic competition when there is no tacit collusion. It may be classified in three ways: by style or type, location, or quality. Competing merchants' goods are thought to be imperfect substitutes.

Producers compete for the same market, so entry by more producers reduces the quantity each existing producer sells at any given price. In addition, consumers gain from the increased diversity of products

In a monopolistically competitive industry, each business is faced with a downward-sloping demand curve and marginal revenue curve, much like a monopolist. At its profit-maximizing quantity, it may make a profit or lose money in the short term. If the typical firm earns positive profit, new firms will enter the industry in the long run, shifting each existing firm’s demand curve to the left. If the typical firm incurs a loss, some existing firms will exit the industry in the long run, shifting the demand curve of each remaining firm to the right.

In the long run, a monopolistically competitive industry ends up in zero-profit equilibrium: each firm makes zero profit at its profit-maximizing quantity.

In the long-run equilibrium of a monopolistically competitive industry, there are many firms, each earning zero profit.

Price exceeds marginal cost, so some mutually beneficial trades are unexploited.

Because they do not minimize average total cost, monopolistically competitive firms have excess capacity. However, it is unclear if this is a source of inefficiency because customers benefit from product diversity.

In industries with product differentiation, firms advertise in order to increase the demand for their products.

Advertising is not a waste of resources when it gives consumers useful information about products.

Advertising that simply touts a product is harder to explain. Either consumers are irrational, or expensive advertising communicates that the firm’s products are of high quality.

Some firms create brand names. As with advertising, the economic value of brand names can be ambiguous. They convey real information when they assure consumers of the quality of a product.

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