monopolistic-competition

Characteristics of Monopolistic Markets

• The characteristics of monopolistic competition are as follows

1. There are a large number of small firms: each one is relatively small and can act independently of the market

2. There are low barriers to entry and exit from the industry: firms can start-up or leave the industry with relative ease which increases the level of competition

3. The products are slightly differentiated: this structure exists as consumers have different desires e.g. two nail bars can differentiate their product through either an express or pampered service. Some consumers may want a quick service, while others want more attention. A relatively homogenous product has now been differentiated

4. There is a low degree of market power and some price setting ability

Profit Maximising Equilibrium in the Short and Long-run

• In order to maximise profit, firms in monopolistic competition produce up to the level of output where marginal cost = marginal revenue (MC=MR)

• The firm does have some market power and is able to influence the price and quantity

  • The firm is a price maker

    • This is due to the fact that they have a differentiated product that is desirable by certain consumers

• The firm can make supernormal profit in the short-run

• In the long-run, the firm will return to a long-run equilibrium position in which they make normal profit

  • This is due to inability to defend against new competitors who enter the market and copy the products of existing sellers

  • Firms will attempt to find new ways to differentiate their product to prolong the period of supernormal profit, e.g. a barber shop may add in a pool table and beer fridge for their customers to enjoy, thus making them different from the competition (for a period of time)

Monopolistic Competition Diagrams

Short-run profit maximisation

• Firms in monopolistic competition are able to make supernormal profit in the short-run

• The AR curve is the demand curve of the firm and it is downward sloping

  •  The firm has some market power due to the level of product differentiation that exists

    • To sell an additional unit of output, the firm will have to decrease its price

    • The marginal revenue (MR) curve will fall twice as quickly as the AR

Diagram analysis

• The firm produces at the profit maximisation level of output where MC = MR (Q₁)

  • At this level the AR (P₁) > AC (C₁)

  • The firm is making supernormal profit

Short-run losses

• Firms in monopolistic competition are able to make losses in the short-run

Diagram analysis

• The firm produces at the profit maximisation level of output where MC = MR (Q_E)

  • At this level of output, the AR (P_E) < AC (C₁)

  • The firm’s loss is =<img alt=”space left parenthesis straight P subscript straight E space minus space straight C subscript 1 right parenthesis space cross times space straight Q subscript straight E” data-mathml='<math style=”font-family:Arial” ><semantics><mstyle mathsize=”14px”><mo> </mo><mo>(</mo><msub><mi mathvariant=”normal”>P</mi><mi mathvariant=”normal”>E</mi></msub><mo> </mo><mo>-</mo><mo> </mo><msub><mi mathvariant=”normal”>C</mi><mn>1</mn></msub><mo>)</mo><mo> </mo><mo>×</mo><mo> </mo><msub><mi mathvariant=”normal”>Q</mi><mi mathvariant=”normal”>E</mi></msub></mstyle><annotation encoding=”application/vnd.wiris.mtweb-params+json”>{“language”:”en”,”fontFamily”:”Times New Roman”,”fontSize”:”18″}</annotation></semantics></math>’ height=”22″ role=”math” src=”data:image/svg+xml;charset=utf8,%3Csvg%20xmlns%3D%22http%3A%2F%2Fwww.w3.org%2F2000%2Fsvg%22%20xmlns%3Awrs%3D%22http%3A%2F%2Fwww.wiris.com%2Fxml%2Fmathml-extension%22%20height%3D%2222%22%20width%3D%22109%22%20wrs%3Abaseline%3D%2214%22%3E%3C!–MathML%3A%20%3Cmath%20xmlns%3D%22http%3A%2F%2Fwww.w3.org%2F1998%2FMath%2FMathML%22%20style%3D%22font-family%3AArial%22%3E%3Cmstyle%20mathsize%3D%2214px%22%3E%3Cmo%3E%26%23xA0%3B%3C%2Fmo%3E%3Cmo%3E(%3C%2Fmo%3E%3Cmsub%3E%3Cmi%20mathvariant%3D%22normal%22%3EP%3C%2Fmi%3E%3Cmi%20mathvariant%3D%22normal%22%3EE%3C%2Fmi%3E%3C%2Fmsub%3E%3Cmo%3E%26%23xA0%3B%3C%2Fmo%3E%3Cmo%3E-%3C%2Fmo%3E%3Cmo%3E%26%23xA0%3B%3C%2Fmo%3E%3Cmsub%3E%3Cmi%20mathvariant%3D%22normal%22%3EC%3C%2Fmi%3E%3Cmn%3E1%3C%2Fmn%3E%3C%2Fmsub%3E%3Cmo%3E)%3C%2Fmo%3E%3Cmo%3E%26%23xA0%3B%3C%2Fmo%3E%3Cmo%3E%26%23xD7%3B%3C%2Fmo%3E%3Cmo%3E%26%23xA0%3B%3C%2Fmo%3E%3Cmsub%3E%3Cmi%20mathvariant%3D%22normal%22%3EQ%3C%2Fmi%3E%3Cmi%20mathvariant%3D%22normal%22%3EE%3C%2Fmi%3E%3C%2Fmsub%3E%3C%2Fmstyle%3E%3C%2Fmath%3E–%3E%3Cdefs%3E%3Cstyle%20type%3D%22text%2Fcss%22%3E%40font-face%7Bfont-family%3A’math1298aafb3379f56b0a3af85c9c2’%3Bsrc%3Aurl(data%3Afont%2Ftruetype%3Bcharset%3Dutf-8%3Bbase64%2CAAEAAAAMAIAAAwBAT1MvMi7iBBMAAADMAAAATmNtYXDEvmKUAAABHAAAADxjdnQgDVUNBwAAAVgAAAA6Z2x5ZoPi2VsAAAGUAAAA4WhlYWQQC2qxAAACeAAAADZoaGVhCGsXSAAAArAAAAAkaG10eE2rRkcAAALUAAAADGxvY2EAHTwYAAAC4AAAABBtYXhwBT0FPgAAAvAAAAAgbmFtZaBxlY4AAAMQAAABn3Bvc3QB9wD6AAAEsAAAACBwcmVwa1uragAABNAAAAAUAAADSwGQAAUAAAQABAAAAAAABAAEAAAAAAAAAQEAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAACAgICAAAAAg1UADev96AAAD6ACWAAAAAAACAAEAAQAAABQAAwABAAAAFAAEACgAAAAGAAQAAQACANciEv%2F%2FAAAA1yIS%2F%2F%2F%2FKt3wAAEAAAAAAAAAAAFUAywAgAEAAFYAKgJYAh4BDgEsAiwAWgGAAoAAoADUAIAAAAAAAAAAKwBVAIAAqwDVAQABKwAHAAAAAgBVAAADAAOrAAMABwAAMxEhESUhESFVAqv9qwIA%2FgADq%2FxVVQMAAAIAgABVAtUCgAADAAcARhiwARQAsQAAExCxAAnksQABExCwBDyxBgj0sAI8MAGxCAETELEAA%2FawBzyxAQX1sAY8sgUHABD0sAI8sQkD5rEEBfWwAzwTMwEjETMBI4BVAgBVVf4AVQKA%2FdUCK%2F3VAAEAgAFVAtUBqwADADAYAbAEELEAA%2FawAzyxAgf1sAE8sQUD5gCxAAATELEABuWxAAETELABPLEDBfWwAjwTIRUhgAJV%2FasBq1YAAAAAAQAAAAEAANV4zkFfDzz1AAMEAP%2F%2F%2F%2F%2FWOhNz%2F%2F%2F%2F%2F9Y6E3MAAP8gBIADqwAAAAoAAgABAAAAAAABAAAD6P9qAAAXcAAA%2F7YEgAABAAAAAAAAAAAAAAAAAAAAAwNSAFUDVgCAA1YAgAAAAAAAAAAoAAAAlwAAAOEAAQAAAAMAXgAFAAAAAAACAIAEAAAAAAAEAADeAAAAAAAAABUBAgAAAAAAAAABABIAAAAAAAAAAAACAA4AEgAAAAAAAAADADAAIAAAAAAAAAAEABIAUAAAAAAAAAAFABYAYgAAAAAAAAAGAAkAeAAAAAAAAAAIABwAgQABAAAAAAABABIAAAABAAAAAAACAA4AEgABAAAAAAADADAAIAABAAAAAAAEABIAUAABAAAAAAAFABYAYgABAAAAAAAGAAkAeAABAAAAAAAIABwAgQADAAEECQABABIAAAADAAEECQACAA4AEgADAAEECQADADAAIAADAAEECQAEABIAUAADAAEECQAFABYAYgADAAEECQAGAAkAeAADAAEECQAIABwAgQBNAGEAdABoACAARgBvAG4AdABSAGUAZwB1AGwAYQByAE0AYQB0AGgAcwAgAEYAbwByACAATQBvAHIAZQAgAE0AYQB0AGgAIABGAG8AbgB0AE0AYQB0AGgAIABGAG8AbgB0AFYAZQByAHMAaQBvAG4AIAAxAC4AME1hdGhfRm9udABNAGEAdABoAHMAIABGAG8AcgAgAE0AbwByAGUAAAMAAAAAAAAB9AD6AAAAAAAAAAAAAAAAAAAAAAAAAAC5BxEAAI2FGACyAAAAFRQTsQABPw%3D%3D)format(‘truetype’)%3Bfont-weight%3Anormal%3Bfont-style%3Anormal%3B%7D%40font-face%7Bfont-family%3A’round_brackets18549f92a457f2409’%3Bsrc%3Aurl(data%3Afont%2Ftruetype%3Bcharset%3Dutf-8%3Bbase64%2CAAEAAAAMAIAAAwBAT1MvMjwHLFQAAADMAAAATmNtYXDf7xCrAAABHAAAADxjdnQgBAkDLgAAAVgAAAASZ2x5ZmAOz2cAAAFsAAABJGhlYWQOKih8AAACkAAAADZoaGVhCvgVwgAAAsgAAAAkaG10eCA6AAIAAALsAAAADGxvY2EAAARLAAAC%2BAAAABBtYXhwBIgEWQAAAwgAAAAgbmFtZXHR30MAAAMoAAACOXBvc3QDogHPAAAFZAAAACBwcmVwupWEAAAABYQAAAAHAAAGcgGQAAUAAAgACAAAAAAACAAIAAAAAAAAAQIAAAAAAAAA