5.6

• In what ways does monopolistic competition resemble perfect competition ?

  • large number of firms in the market
  • No barriers to entry or exit in the long run
  • Entry of new firms, attracted by short-run abnormal profits, bring down the price each firm can charge until only normal profits are made in the long run
• how does monopolistic competition resemble monopoly?

  • each firm faces a downward-sloping demand curve. results from the fact that each firm produces a slightly different product
  • products produced by each firm provide partial but not perfect substitutes for each other
  • the scale of differentiation ensures that each firm possesses a degree of monopoly power over products
  • if a firm raises its price it doesn’t lose its customers due to brand loyalty
  • each firms MR curve is below its AR curve which is the demand curve for the firms output
• what is the completion like in monopolistically competitive markets?

  Imperfect
• in monopolistic competition, firms are short run profit maximisers
• what is monopolistic competition ?

  A market structure with many firms selling similar but slightly differentiated product, firms have some market power but face competition
• key characteristics of monopolistic competition?

  1. many buyers and sellers
  2. low barriers to entry/exit
  3. product differentiation
  4. some price-setting power
  5. non-price competition (e.g branding, ads)
• what is product differentiation ?

  making products seem different through branding, design or features - even if the core product is similar
• cna firms make supernormal profit in monopolistic competition?

  yes, but only in the short run - due to product differentiation
• why do supernormal profits disappear in the long run in monopolistic competition?

  because new firms enter (due to low barriers), increasing competition -> demand for each firm falls -> normal profits disappear remains
• in the long run, are firms in monopolistic competition productively efficient ?

  no, firms do not produce at the lowest point on AC curve -> some inefficient
• in the long run, are firms in monopolistic competition allocatively efficient ?

  No, P>MC, so they are not product the quantity that maximised consumer welfare
• why do monopolistically competitive firms still survive despite inefficiencies?

  because they offer variety, brand loyalty and can charge slightly higher prices based on consumer preference
• what type of competition is most common in monopolistic completion ?

  non-price competition - firms try to stand out via branding, quality, design, ads, packaging, customer service etc.
• advantages of monopolistic competition

  • consumer choice
  • firms respond to consumer needs
  • lower prices than monopoly
  • encourages innovation and marketing
• disadvantages of monopolistic competition

  • inefficiency (allocative and productive)
  • advertising can be wasteful
  • short-run supernormal profits may be lost
• profit maximisation definition

  occurs at the level of output at which total profit is greatest
• monopoly power definition

  the power that a single company have over setting the prices in a single market
• what is the principle of minimum differentiation?

  Entering a market with similar products makes it easier for consumers to switch
• in what two ways can advertising be split into?

  informative and persuasive
• what does informative advertising do ?

  increases competition as it provides consumers and producers with useful information
• what does persuasive advertising do?

  reduces competition as demand less price elastic. ensures customers are unwilling to buy cheaper alternatives
• what does advertising focus on?

  on how ownership or the use of product will improve the consumer‘s feelings of self-worth and/or the image portrayed to other people
• what advertising does persuasive advertising go well with?

  saturation advertising - small firms cannot compete with the volume of advertising and other sales promotion techniques used by monopolies
• what is price competition?

  Competing based on lower prices
• price competition often used by firms to:

  • increase market share
  • protect market share
• in monopolistic competition and oligopolistic markets, firms often use the following non-price competition:

  1. use of tied contacts where exclusive rights to sell products can be obtained
  2. use of persuasive advertising
  3. product differentiation
  4. brand imaging
  5. packaging
  6. quality competition including sales service etc.
• in monopolistic competition, consumers benefit from the choice offered by a large number of firms selling slightly differentiated products