CH 13: MONOPOLISTIC COMPETITION
Monopolistic Competitive industries
CHARACTERISTICS
Large no of sellers
Differentiated products
Easy Entry and exit into industry
Small Market shares
No collisions
Independent action: no interdependence on pricing policy
Products/ services are different and offer varying degrees of customer services
Easy entry and exit compared to Oligopoly and Monopoly.
Typically small firms
Low capital requirements
Advertising:
The goal of product Differentiation & advertising is to make Price a non-factor (non-price competition) And make product differences a greater factor.
Demand curve is less elastic and shifts to the right
Degree of concentration
Four-firm concentration Ratio
Four Firm Concentration Ratio+ Output of top four firms/ Total output of industry
Herfindahl index
Herfindal index = (%S1)^2 + (%S2)^2 + ... + (%Sn)^2
Generalisation: lower the Herfindahl index , the greater the likelihood that an industry is Monopolistically competitive rather than ogliopolistic
Price and Output in Monopolistic Competition
Firms Demand curve
Highly but not perfectly elastic
Price elasticity depends on no of rivals & degree of product diff. The larger the no of rivals the weaker the product diff. the greater the price elasticity
Short run: Profit or loss
Similar to Pure competition
Economic profit = (P - A) x Q
Long Run: Only normal profit
Monopolistic Competition efficiency
EFFICIENCY = P = MC= Min ATC
no productive or allocative efficiency occur in long-run equilibriums
excess capacity: gap between Min ATC output profit Maximisation output identifies excess capacity
Causes under-allocation of resources
Product Variety
The stronger the differentiation the greater the excess capacity & therfore the greater the product inefficiency.
Product diff. will satisfy great diversity of customer taste.
Therefore the greater the excess capacity problem the greater the range of customer choice.