Monopolistic Monopolistic CompetitionCompetitionMonopolistic Monopolistic CompetitionCompetition

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Monopolistic Competition…Monopolistic Competition…

Developed in1933 by American economist Edward Chamberlin (1899-1967) and English economist Joan Robinson (1903-1983)

Monopolistically competitive firm's own demand curve is highly elastic, permitting it to vary its price within a narrow range of prices. The other firms' products are either very close substitutes or, a large number of other firms' products are substitutes (not necessarily very close substitutes).

Monopolistic Competition …Monopolistic Competition …

A type of competition within an industry A type of competition within an industry where:where:

1. All firms produce similar yet not 1. All firms produce similar yet not perfectly substitutable products.perfectly substitutable products.

2. All firms are able to enter the 2. All firms are able to enter the industry if the profits are attractive.industry if the profits are attractive.

3. All firms are profit maximizers.3. All firms are profit maximizers.

4. All firms have some market power, 4. All firms have some market power, which means none are price takers. which means none are price takers.

Monopolistic competition differs from perfect competition in that production does not take place at the lowest possible cost. Because of this, firms are left with excess production capacity.

A monopolistically competitive firm acts like a monopolist in that the firm is able to influence the market price of its product by altering the rate of production of the product.

Unlike in perfect competition, monopolistically competitive firms produce products that are not perfect substitutes. As such, brand X's product, which is different (or at least perceived to be different) from all other brands' products, is available from only a single producer.

Definitions of Monopolistic Competition Definitions of Monopolistic Competition ……

Unlike in perfect competition, the monopolistically competitive firm does not produce at the lowest attainable average total cost. Instead, the firm produces at an inefficient output level, reaping more in additional revenue than it incurs in additional cost versus the efficient output level.

To say that products are differentiated is to say that the products may be (more or less) good substitutes, but they are not perfect substitutes. For example…

Monopolistic competitionMonopolistic competition

Equilibrium of the firm:short run

Equilibrium of the firm:short run

£

Q O Qs

AR D

MC

AC

MR

Short-run equilibrium of the firmunder monopolistic competitionShort-run equilibrium of the firmunder monopolistic competition

Ps

ACs

Monopolistic competitionMonopolistic competition

Equilibrium of the firm:long run

Equilibrium of the firm:long run

Long-run equilibrium of the firmunder monopolistic competitionLong-run equilibrium of the firmunder monopolistic competition

ARL DL

MRL

£

Q O QL

PL

LRAC

LRMC

Monopolistic competitionMonopolistic competition

Comparison with perfect competition (long run)

Comparison with perfect competition (long run)

Q2

P2 DL under perfect

competition

Long run equilibrium of the firm under perfect andmonopolistic competition

Long run equilibrium of the firm under perfect andmonopolistic competition

£

QO

P1

LRAC

DL under monopolistic

competition

Q1