ECON 1 Lecture Notes - Lecture 15: Monopolistic Competition, Perfect Competition, Bottled Water
#15 Thursday 3/15 (Ch.16 Competitive Monopolistic
Markets)
Two extremes
● Perfect competition: many firms, identical products
● Monopoly: one firm
In between:
Monopolistic competition:
● Many firms sell similar but not identical products.
● Free entry, 0 profits
Monopolistic Competition
Differentiated products are everywhere
Examples
● Apartment
● Books
● Bottled water
● Clothing
● Fast food
● Night clubs
Comparison with Monopoly and Competition
● Because the product is differentiated, the firm faces a downward-sloping D
curve
○ Like monopoly
○ Different from perfect competition, where firms sell the same product, face horizontal D curve
● Because there is free entry, no long run profits
○ Like perfect competition
○ Different form monopoly
Short Run - Profits
To maximize profit, firm produces Q where MR
= MC
.
The firm uses the D
curve to set P
.
(like monopoly)
Document Summary
Many firms sell similar but not identical products. Because the product is differentiated, the firm faces a downward-sloping d curve. Because there is free entry, no long run profits. Different from perfect competition , where firms sell the same product, face horizontal d curve. To maximize profit, firm produces q where mr = mc . The firm uses the d curve to set p . (like monopoly) If profits in the short run: new firms enter, taking demand away from existing firms, prices and profits fall. If losses in the short run: some firms exit, remaining firms enjoy higher demand and prices. Entry and exit occurs until profit is zero. Why monopolistic competition is less efficient than perfect competition. P > mc, markup over marginal cost. Monopolistic competition does not have all of the desirable properties of perfect competition. There is a deadweight loss caused by the markup of price over marginal cost.