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MONOPOLISTIC COMPETITION:Monopolistic Competition in the Market for Colas and Coffee

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Microeconomics ­ECO402
VU
Lesson 39
MONOPOLISTIC COMPETITION
Characteristics
1) Many firms
2) Free entry and exit
3) Differentiated product
The amount of monopoly power depends on the degree of differentiation.
Examples of this very common market structure include:
­ Toothpaste
­ Soap
­ Cold remedies
Toothpaste
­ Brand J and monopoly power
·  Suppose an MNC is the sole producer of Brand J
·  Consumers can have a preference for Brand J---taste, reputation, decay preventing
efficacy
·  The greater the preference (differentiation) the higher the price.
The Makings of Monopolistic Competition
­ Two important characteristics
·  Differentiated but highly substitutable products
·  Free entry and exit
A Monopolistically Competitive Firm in the Short and Long Run
$/Q
$/Q
Long Run
Short Run
MC
MC
AC
AC
PSR
PLR
DSR
DLR
MRSR
MRLR
Quantity
QSR
QLR
Quantity
Observations (short-run)
­ Downward sloping demand--differentiated product
­ Demand is relatively elastic--good substitutes
­ MR < P
­ Profits are maximized when MR = MC
179
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Microeconomics ­ECO402
VU
­ This firm is making economic profits
Observations (long-run)
­ Profits will attract new firms to the industry (no barriers to entry)
­ The old firm's demand will decrease to DLR
­ Firm's output and price will fall
­ Industry output will rise
­ No economic profit (P = AC)
­ P > MC -- some monopoly power
Monopolistically Competitive vs. Perfectly Competitive Equilibrium
Monopolistic Competition
Perfect Competition
$/Q
$/Q
Deadweight
loss
MC
AC
MC
AC
P
PC
D=
DLR
MRLR
Quantity
Quantity
QC
QMC
Monopolistic Competition and Economic Efficiency
­ The monopoly power (differentiation) yields a higher price than perfect competition. If
price was lowered to the point where MC = D, consumer surplus would increase by the
shaded triangle.
­ With no economic profits in the long run, the firm is still not producing at minimum AC
and excess capacity exists.
Questions
1) If the market became competitive, what would happen to output and price?
2) Should monopolistic competition be regulated?
Monopolistic Competition in the Market for Colas and Coffee
The markets for soft drinks and coffee illustrate the characteristics of monopolistic
competition.
180
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Microeconomics ­ECO402
VU
Elasticities of Demand for Brands of Colas and Coffee
Colas: Brand X -2.4
Brand Y -
5.2 to -5.7
Ground Coffee:
Hills Brothers -7.1
Maxwell House
-8.9
Chase and Sanborn -5.6
Questions
1) Why is the demand for Brand X more price inelastic than for Brand Y?
2) Is there much monopoly power in these two markets?
3) Define the relationship between elasticity and monopoly power.
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Table of Contents:
  1. ECONOMICS:Themes of Microeconomics, Theories and Models
  2. Economics: Another Perspective, Factors of Production
  3. REAL VERSUS NOMINAL PRICES:SUPPLY AND DEMAND, The Demand Curve
  4. Changes in Market Equilibrium:Market for College Education
  5. Elasticities of supply and demand:The Demand for Gasoline
  6. Consumer Behavior:Consumer Preferences, Indifference curves
  7. CONSUMER PREFERENCES:Budget Constraints, Consumer Choice
  8. Note it is repeated:Consumer Preferences, Revealed Preferences
  9. MARGINAL UTILITY AND CONSUMER CHOICE:COST-OF-LIVING INDEXES
  10. Review of Consumer Equilibrium:INDIVIDUAL DEMAND, An Inferior Good
  11. Income & Substitution Effects:Determining the Market Demand Curve
  12. The Aggregate Demand For Wheat:NETWORK EXTERNALITIES
  13. Describing Risk:Unequal Probability Outcomes
  14. PREFERENCES TOWARD RISK:Risk Premium, Indifference Curve
  15. PREFERENCES TOWARD RISK:Reducing Risk, The Demand for Risky Assets
  16. The Technology of Production:Production Function for Food
  17. Production with Two Variable Inputs:Returns to Scale
  18. Measuring Cost: Which Costs Matter?:Cost in the Short Run
  19. A Firm’s Short-Run Costs ($):The Effect of Effluent Fees on Firms’ Input Choices
  20. Cost in the Long Run:Long-Run Cost with Economies & Diseconomies of Scale
  21. Production with Two Outputs--Economies of Scope:Cubic Cost Function
  22. Perfectly Competitive Markets:Choosing Output in Short Run
  23. A Competitive Firm Incurring Losses:Industry Supply in Short Run
  24. Elasticity of Market Supply:Producer Surplus for a Market
  25. Elasticity of Market Supply:Long-Run Competitive Equilibrium
  26. Elasticity of Market Supply:The Industry’s Long-Run Supply Curve
  27. Elasticity of Market Supply:Welfare loss if price is held below market-clearing level
  28. Price Supports:Supply Restrictions, Import Quotas and Tariffs
  29. The Sugar Quota:The Impact of a Tax or Subsidy, Subsidy
  30. Perfect Competition:Total, Marginal, and Average Revenue
  31. Perfect Competition:Effect of Excise Tax on Monopolist
  32. Monopoly:Elasticity of Demand and Price Markup, Sources of Monopoly Power
  33. The Social Costs of Monopoly Power:Price Regulation, Monopsony
  34. Monopsony Power:Pricing With Market Power, Capturing Consumer Surplus
  35. Monopsony Power:THE ECONOMICS OF COUPONS AND REBATES
  36. Airline Fares:Elasticities of Demand for Air Travel, The Two-Part Tariff
  37. Bundling:Consumption Decisions When Products are Bundled
  38. Bundling:Mixed Versus Pure Bundling, Effects of Advertising
  39. MONOPOLISTIC COMPETITION:Monopolistic Competition in the Market for Colas and Coffee
  40. OLIGOPOLY:Duopoly Example, Price Competition
  41. Competition Versus Collusion:The Prisoners’ Dilemma, Implications of the Prisoners
  42. COMPETITIVE FACTOR MARKETS:Marginal Revenue Product
  43. Competitive Factor Markets:The Demand for Jet Fuel
  44. Equilibrium in a Competitive Factor Market:Labor Market Equilibrium
  45. Factor Markets with Monopoly Power:Monopoly Power of Sellers of Labor