Click to edit Master title style,Click to edit Master text styles,Second Level,Third Level,Fourth Level,Fifth Level,Four Types of Industries,Imperfectly Competitive Markets,Monopoly,Monopolistic Competition,Many firms selling products that are similar but not identical.,Oligopoly,Only a few sellers, each offering a similar or identical product to the others.,The Four Types of Market Structure,Monopoly,Oligopoly,Monopolistic Competition,Perfect Competition,Tap water,Cable TV,Tennis balls,Crude oil,Novels,Movies,Wheat,Milk,Number of Firms?,Type of Products?,Many firms,One firm,Few firms,Differentiated products,Identical products,Monopolistic Competition,Monopolistic Competition,Markets that have some features of competition and some features of monopoly.,Attributes of Monopolistic Competition,Many sellers,Product differentiation,Free entry and exit,-,Many Sellers,There are many firms competing for the same group of customers.,Product examples include books, CDs, movies, computer games, restaurants, piano lessons, cookies, furniture, etc.,Product Differentiation,Each firm produces a product that is at least slightly,different,from those of other firms.,Rather than being a price taker, each firm,faces a downward-sloping demand curve.,Free Entry or Exit,Firms can enter or exit the market,without restriction,.,The number of firms in the market adjusts until economic profits are,zero.,Monopolistic Competitors in the Short Run.,(a) Firm Makes a Profit,Quantity,0,Price,Demand,MR,ATC,Profit,MC,Profit-,maximizing quantity,Price,Average,total cost,Monopolistic Competitors in the Short Run.,Quantity,0,Price,Demand,MR,Losses,(b) Firm Makes Losses,MC,ATC,Average,total cost,Loss- minimizing quantity,Price,Monopolistic Competition in the Short Run,Short-run economic profits,encourage new firms to,enter the market,. This:,Increases the number of products offered.,Reduces demand faced by firms already in the market.,Incumbent,（传统运营商）,firms demand curves shift to the left.,Demand for the incumbent firms products fall, and their profits decline.,Monopolistic Competition in the Short Run,Short-run economic losses,encourage firms to,exit the market,. This:,Decreases the number of products offered.,Increases demand faced by the remaining firms.,Shifts the remaining firms demand curves to the right.,Increases the remaining firms profits.,The Long-Run Equilibrium,Firms will enter and exit until the firms are making exactly,zero economic profits.,A Monopolistic Competitor in the Long Run.,zero economic profits,Quantity,Price,0,Demand,MR,ATC,MC,Profit-maximizing,quantity,P=,ATC,Two Characteristics of Long-Run Equilibrium,As in a monopoly, price exceeds marginal cost.,Profit maximization requires marginal revenue to equal marginal cost.,The downward-sloping demand curve makes marginal revenue less than price.,Two Characteristics of Long-Run Equilibrium,As in a competitive market, price equals average total cost.,Free entry and exit drive economic profit to zero.,Monopolistic versus Perfect Competition,There are two noteworthy differences between monopolistic and perfect competition,excess capacity,（超额的产能）,and,markup,（加价）,.,Excess Capacity,There is excess capacity in monopolistic competition in the long run.,In monopolistic competition, output is less than the efficient scale of perfect competition.,Excess Capacity.,Quantity,(a) Monopolistically Competitive Firm,(b) Perfectly Competitive Firm,Quantity,Price,P = MR,(demand curve),MC,ATC,Price,Demand,MC,ATC,Excess capacity,Quantity,produced,Efficient,scale,P = MC,Quantity,produced,= Efficient,scale,P,Excess Capacity,There is no excess capacity in perfect competition in the long run.,Free entry results in competitive firms producing at the point where average total cost is minimized, which is the,efficient scale,of the firm.,Markup Over Marginal Cost,For a competitive firm, price equals marginal cost.,For a monopolistically competitive firm, price exceeds marginal cost.,Markup Over Marginal Cost,Because price exceeds marginal cost, an extra unit sold at the posted price means more profit for the monopolistically competitive firm.,Markup Over Marginal Cost.,Quantity,(a) Monopolistically Competitive Firm,(b) Perfectly Competitive Firm,Quantity,Price,P,=,MC,P,=,MR,(demand curve),MC,ATC,Quantity,produced,Price,P,Demand,Marginal,cost,MC,ATC,MR,Markup,Quantity,produced,Monopolistic versus Perfect Competition.,Quantity,(a) Monopolistically Competitive Firm,(b) Perfectly Competitive Firm,Quantity,Price,P,=,MR,(demand curve),MC,ATC,Quantity,produced,Efficient,scale,Price,P,Demand,MC,ATC,P,=,MC,Excess capacity,Marginal cost,Markup,MR,Quantity produced = Efficient scale,Monopolistic Competition and the Welfare of Society,Monopolistic competition,does not have all the desirable properties of perfect competition.,Monopolistic Competition and the Welfare of Society,There is the normal deadweight loss of monopoly pricing in monopolistic competition caused by the markup of price over marginal cost.,However, the administrative burden of regulating the pricing of all firms that produce differentiated products would be overwhelming.,Monopolistic Competition and the Welfare of Society,Another way in which monopolistic competition may be socially inefficient is that the number of firms in the market may not be the “ideal” one.,Product Differentiation,Product differentiation: the effort by firms to produce goods that are slightly different from other types of goods.,Homogeneous products: goods that have no product differentiation; goods that are exactly the same.,Advertising,When firms sell differentiated products and charge prices above marginal cost, each firm has an incentive to advertise in order to attract more buyers to its particular product.,Advertising,Firms that sell highly differentiated consumer goods typically spend between 10 and 20 percent of revenue on advertising.,Overall, about 2 percent of total revenue, or over $100 billion a year, is spent on advertising.,Advertising,Critics of advertising argue that firms advertise in order to manipulate peoples tastes.,They also argue that it impedes (,阻碍,) competition by implying that products are more different than they truly are.,Advertising,Defenders argue that advertising provides information to consumers,They also argue that advertising increases competition by offering a greater variety of products and prices.,The willingness of a firm to spend advertising dollars can be a,signal,to consumers about the quality of the product being offered.,Brand Names,Critics argue that brand names cause consumers to perceive differences that do not really exist.,How are Products Differentiated?,Ways to differentiate products:,Physical characteristics,Altering the products physical characteristics, such as making the legroom in a car longer or making a knife sharper.,Location,A McDonalds restaurant 10 miles away has the same menu and the same product as the one down the street. However, it is more likely for you to buy from the nearer restaurant.,3) Time,a flight from Los Angeles to New York that leaves at 10 a.m. is a different product as one that leaves at 6 p.m;,a 24 hour supermarket offers a different service from another that isnt.,Convenience:,yogurt in a tube, single serving microwaveable soups, etc., offers more convenience to the ever busy individual.,How are Products Differentiated?,Brand Names,Economists have argued that brand names may be a useful way for consumers to ensure that the goods they are buying are of high quality.,providing,information,about quality.,giving firms,incentive,to maintain high quality.,Summary,A monopolistically competitive market is characterized by three attributes: many firms, differentiated products, and free entry.,The equilibrium in a monopolistically competitive market differs from perfect competition in that each firm has excess capacity and each firm charges a price above marginal cost.,Summary,Monopolistic competition does not have all of the desirable properties of perfect competition.,There is a standard deadweight loss of monopoly caused by the markup of price over marginal cost.,The number of firms can be too large or too small.,Summary,The product differentiation inherent in monopolistic competition leads to the use of advertising and brand names.,Critics of advertising and brand names argue that firms use them to take advantage of consumer irrationality and to reduce competition.,Summary,Defenders argue that firms use advertising and brand names to inform consumers and to compete more vigorously on price and product quality.,