Monopolistic

Competition,
Oligopoly, and
Strategic Pricing

Monopolistic
Competition

The four distinguishing characteristics of

monopolistic competition are:

Many sellers.

Differentiated products.

Multiple dimensions of competition.

Easy entry of new firms in the long run.

Many Sellers

When there are many sellers as in monopolistic

competition, they do not take into account rivals
reactions.

The existence of many sellers also makes

collusion difficult.

Monopolistically competitive firms act

independently.

Differentiated Products

The many sellers characteristic gives

monopolistic competition its competitive aspect.

Product differentiation gives monopolistic

competition its monopolistic aspect.

Differentiated Products
Differentiation exists so long as advertising
convinces buyers that it exists.

Firms will continue to advertise as long

as the marginal benefits of advertising
exceed its marginal costs.

Multiple Dimensions of
Competition

One dimension of competition is product

differentiation.

Another is competing on perceived quality.

Competitive advertising is another.

Others include service and distribution outlets.

Easy Entry of New Firms

in the Long Run

There are no significant barriers to entry.

Barriers to entry prevent competitive pressures.

Ease of entry limits long-run profit.

Output, Price, and Profit of a

Monopolistic Competitor

A monopolistically competitive firm prices in the

same manner as a monopolistwhere MC = MR.

But the monopolistic competitor is not only a

monopolist but a competitor as well.

Output, Price, and Profit of a

Monopolistic Competitor
At equilibrium, ATC equals price and economic
profits are zero.

This occurs at the point of tangency

of the ATC and demand curve at the
output chosen by the firm.

Monopolistic Competition
Price

MC
ATC

PM

MR
0

QM

D
Quantity

Comparing Monopolistic
Competition with Perfect
Competition

Both the monopolistic competitor and the perfect competitor make

zero economic profit in the long run.

Comparing Monopolistic
Competition with Perfect
Competition

The perfect competitors demand curve is perfectly elastic.

Easy entry, zero economic profits, and a uniform product means that
the perfect competitor produces at the minimum of the ATC curve.

Comparing Monopolistic
Competition with Perfect
Competition

A monopolistic competitor faces a downward sloping demand

curve, and produces where MC = MR.

The ATC curve is tangent to the

demand curve at that level, which is not
at the minimum point of the ATC curve.

Comparing Monopolistic
Competition with Perfect
Competition

Increasing market share is a relevant concern for a monopolistic

competitor but not for a perfect competitor.

Comparing Monopolistic
Competition with Perfect
Competition

In the real world of monopolistic competition, increasing output and

market share lowers average total cost.

Comparing Perfect and

Monopolistic Competition
Perfect competition
Price

Price

MC
ATC
D

PC

Monopolistic competition

QC

Quantity

MC
ATC

PM
PC

QM

MR
D
QC Quantity

Comparing Monopolistic
Competition with Monopoly

The difference between a monopolist and a

monopolistic competitor is in the position of the
average total cost curve in long-run equilibrium.

Comparing Monopolistic
Competition with Monopoly

For a monopolist, the average total cost curve can

be, but need not be, at a position below price so
that the monopolist makes a long-run economic
profit.

Comparing Monopolistic
Competition with Monopoly

For a monopolistic competitor, the average total

cost curve is tangent to the demand curve at the
price and output chose by the monopolistic
competitor so that there are zero economic profits
in the long run.