Chapter 15

• Introduction: Book Market


  Market for books falls between perfect competition and monopoly; real-world markets often have imperfect competition.
• Imperfect Competition: Types

  Imperfect competition includes oligopoly (few firms) and monopolistic competition (many firms with differentiated products).
• Attributes of Monopolistic Competition

  Many firms, product differentiation, free entry and exit.
• Firm Behavior in the Short Run

  Firms face downward-sloping demand curve, follow profit-maximization rule (MR = MC), short-run behavior similar to monopoly.
• Short Run Outcomes in Monopolistic Competition

  Firms can make profits or losses in the short run.
• Long Run Equilibrium in Monopolistic Competition


  Free entry/exit leads to zero economic profit, demand shifts until P = ATC.
• Monopolistic vs. Perfect Competition (Long Run)


  In monopolistic competition, P > MC and firms operate below efficient scale; in perfect competition, P = MC and firms produce at efficient scale.
• Welfare Implications of Monopolistic Competition

  P > MC, leading to welfare loss as some consumers miss beneficial transactions; high administrative burden to impose P = MC.
• Significance of Advertising in Different Markets

  Important for differentiated consumer goods, less so for homogenous or industrial products.
• Arguments Against Advertising

  It manipulates tastes, is psychological rather than informational, reduces competition by making products seem more different.
• Arguments For Advertising


  Provides information, promotes competition by making demand more elastic, facilitates entry of new firms.
• Advertising as a Signal of Quality

  Expensive advertising can indicate high product quality, as firms invest expecting repeat purchases.
• Critics of Brand Names

  Brand names create perceived differences without real distinction.
• Defenders of Brand Names

  Brand names indicate quality, incentivize firms to maintain high standards.
• Summary of Monopolistic Competition

  Blend of monopoly and competition, firms face downward-sloping demand curves, set prices above marginal cost, make zero profits in the long run, advertising attracts new customers but can manipulate tastes and reduce competition.
• Challenges of Policy in Monopolistic Competition


  Improving resource allocation in monopolistically competitive markets through policy is challenging.