MONOPOLISTIC

COMPETITION
S&N, pp. 188-192
Mw, Ch. 17, 15
Monopolistic
Competition
 Many sellers
 Product differentiation
Downward sloping demand curve
 Freeentry and exit
 Examples:
Books, music, movies, computer games,
restaurants, furniture
Short-run position
 A company seeks to maximise profits
Choose Q so Marginal Revenue =
Marginal Cost
Use the demand curve to find the price
If price is above average total cost, firm
makes a profit
If price is below ATC, firm makes a loss
Short-run position
Pri
ce MC

Pmax
ATC
Profit

Demand
MR
Qmax Quantity
Long-run position
 If a firm is making profits other firms will
enter the market with similar products
 These substitutes will shift the original
firm’s demand curve to the left
 If firms are losing money, they exit the
market, shifting the remaining demand
curves to the right
 In the long run remaining firms make
zero profit
Long-run position
Pr
ic
e MC
ATC
Pmax = ATC

MR

Demand
Qmax Efficient Quantity
scale
Comments on monopolistic
competition
 The price is above the marginal cost (c.f.
perfect competition)
 Firms produce below the efficient scale
(i.e. excess capacity exists)
 Does the increased variety compensate
for the higher price?
Price discrimination
 When a product sells at a fixed price there is a
consumer surplus (i.e. some consumers pay less
than their utility)
 Price discrimination describes the strategies used by
firms to extract consumer surplus
 Examples:
○ Airline Tickets
○ Lunch versus dinner menus
○ Flat fee for unlimited calls
○ CD, DVD
○ Hardcover vs. paperback
 Price discrimination involves
 Market segmentation
 Charging different prices for the same (or a similar)
product
Forms of price
discrimination
Price
discrimination
 Examples of price discrimination
Discount coupons
Early-bird discounts
Partial scholarships for toppers
Low-cost carriers
First class travel on planes and trains
Hardback and paperback books

Product
Differentiation
Next week
 National Income Accounting
S&N, Ch 20-22
Mw, Ch 23-25
Sr, 15