...Monopolistic competition: An evolutionary approach EXECUTIVE SUMMARY This term paper shows that a monopolistically competitive equilibrium can evolve without purposive profit maximization. Firms exit the industry if they fail to pass the survival test of making nonnegative wealth. Industry converges in probability to the monopolistically competitive equilibrium as the size of each firm becomes small relative to the market, as the entry cost becomes sufficiently small, and as time gets sufficiently large. Consequently, in the limit, the only surviving firms are those producing at the tangency of the demand curve to the average cost curve and no potential entrant can make a positive profit by entry. Introduction The criterion by which the economic system selects survivors: those who realize profits are the survivors; those who suffer losses disappear. In the late 1920s and early 1930s it became apparent that there were severe limitations in conducting economic analysis using a framework of either pure competition or pure monopoly. Consequently, economists began shifting their attention to middle ground between monopoly and perfect competition. One of the most notable achievements was Chamberlin’s, 1933 blending of elements of perfect competition and pure monopoly in a notion of ‘‘large group’’ monopolistic competition where there are many competing firms producing similar but different commodities which are not perfect substitutes. Because of the product...
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...Monopolistic Competition is a market structure in which there are several or many sellers; each produce similar, but slightly differentiated products. Differentiation can be on the basis of colour, design, size, taste, fragrances, etc. Each producer can set its price and quantity without affecting the marketplace as a whole. Wikipedia explains the concept as, “A common market form. Many marketers can be considered monopolistically competitive, often including the markets for restaurants, cereal, clothing, shoe, and service industry in large cities”. “Monopolistic Competition differs from perfect competition in that production does not take place at the lowest possible cost. Because of this, the firms are left with excess production capacity. This market concept was developed by Chamberlin (USA) and Robinson (Great Britain)” – Investopedia. Chamberlin and Robinson also described this situation as an imperfect competition as the market does not have the conditions required for perfect competition. The characteristics of Monopolistic Competition are stated below: - 1. It has both the elements of Monopoly and Perfect Competition. 2. Large number of buyers and sellers in the market. 3. Non-Price difference (product differentiation) among the competitive products. 4. Few entry as well as exit barriers. 5. All the sellers have relatively small market share. 6. All the firms are profit maximizes. 7. Each firm has a limited ability to affect its output price. 8. The...
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...Chapter 15 Monopolistic Competition MONOPOLISTIC COMPETITION * market structure characterized by many sellers of differentiated products with free entry and exit * differentiated products --> market power * many sellers --> no collusion * free entry and exit --> zero economic profit in the long-run SHORT-RUN --JUST LIKE MONOPOLY * market power --> downward-sloping demand * downward-sloping demand --> marginal revenue less than price * produce the quantity such that MR = MC * charge highest price possible for that Q as shown by demand LONG-RUN--JUST LIKE PERFECT COMPETITION * short-run profit --> entry * entry --> decrease in demand for existing firms until zero profit * short-run loss --> exit * exit --> increase in demand for remaining firms until zero profit LONG RUN--EXCESS CAPACITY * monopolistically competitive firms charge P> MC * zero profit --> P = ATC * P > MC & P = ATC --> ATC > MC * ATC > MC --> ATC is not minimized * higher cost (& therefore price) is the price we pay for product variety MOTIVATION * goal: to develop a position (market niche) * effect: gain market power * reason: other products less likely to be seen as viable substitutes * result: command higher price VALUE IN DIVERSITY VS. COMPETITION AMONG SELLERS * product differentiation involves a trade-off * value in diversity: more products -->...
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...Monopolistic competition (MC) is the market structure of restaurants in Miami, FL. Monopolistic competition is a market structure in which many firms sell a differentiated product into which entry is relatively easy, in which the firm has some control over its product price and in which there is considerable non price competition. In Miami there is a large number of full service restaurants , 34,000, for the city’s population of 2.5 million. In monopolistic competition (MC) there are a large number of small firms, each of which is small compared to the size of the market. In MC all firms are relatively competitive with little market control over price and quantity , and each firm has 1000’s of potential customers. The restaurant business here in Miami is competitive, there are all kinds of restaurants in any neighborhood ranging in different prices with a large population as potential business. In (MC) there is similar but not identical products. Restaurants offer food, and there may be differences from one restaurant to the other as far as Italian, Cuban, Mexican, but the product is underlying food. In (MC) good sold are close but not identical substitutes. Two restaurants might prepare steak but the seasoning the preparation distinguishes each. The goods however satisfy the need to eat. Product differentiation , then, applies to restaurants. The difference in product may be physical, where one restaurant makes chocolate cake the other vanilla. The difference...
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...Monopolistic Competition Monopolistically Competitive industries have the following characteristics: 1. Many small to medium sized firms 2. Similar product, but not identical 3. Less than perfect information, firm has some control over price 4. Easy, but not free, entry. Monopolistic Competition works much like monopoly, but in equilibrium, it has some features of perfect competition. As seen in the graph a monopolistically competitive firm faces a downward sloping demand curve for its output. But, since products in this industry are similar, though differentiated, the curve is relatively flat, reflecting the availability of substitutes. In long-run equilibrium, after entry occurs, we find the firm producing at point F in the next diagram. Here, we see: 1. P > MC 2. P > min AC 3. Max Profit = 0 We have two of the inefficiencies of monopoly, and one of the efficiencies of perfect competition. This firm structure is intermediate between the two. These types of firms will use advertising to shift the demand curve for their product out to the right, and to make it steeper, i.e., to convince consumers that their product has no "good substitutes". This is an attempt to lower the price elasticity of demand. Monopolistic Competition will lead to different versions of the product, but higher prices than perfect comeptition. We will get variety, but must pay for to get it. Besides advertising, we should expect give-aways, coupons, warranties, etc. ...
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...Monopolistic Competition in the Retail Industry The retail industry is a prime example of the modern version of Chamberlin and Robinson’s model of Monopolistic Competition (Grewal, 441). The retail industry consists of vast markets with different brands and goods of one common goal, to sell their products. To cater to this rapidly changing market many large scale retailers are findings ways to make their product more appealing to the public in hopes of gaining market share over their competition. As prices rise, customers are forced to buy substitutes of well-known brand names or alter their preferences. This results in the phenomenon known as monopolistic competition. Monopolistic competition is defined as the result of many firms competing for the same customers in a particular market differentiating their products. If a firm in a purely competitive market can differentiate its product or service, it becomes a part of the monopolistic competition market. Monopolistically, markets are dominated by the following trends: the demand curve is down-ward sloping, no major barriers to entry or exit, profit maximizers, make up the large majority of advertisers, specialize in product differentiation, and each company is free to set their own price and level of output. Due to the retail industry having a large number of firms and competition, there are three major implications of the retail industry that dictate whether a product or brand will succeed. The first implication is how...
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...Evaluate the effectiveness of monopolistic competition and oligopolies in meeting the needs of producers and consumers. A market is a place where buyers and sellers meet to exchange money for goods and services. There are four market structures; perfect competition, monopolistic competition, oligopoly and monopoly. Each structure of market operates in their own ways with each with their own characteristics; each structure has its own number and size of the firms, the level of the competition, product differentiation and difficulty of entering new firms into the market. The two similar structures are monopolistic competition and oligopolies; although they are similar they still operate quite different to each other. Monopolistic competition is defined as the structure with many small firms selling products of similar kind, therefore lots of choice and lots of range which means that there are lots of substitutes. Due to the fact that there are lots of substitutes price plays an important role; if a firm has established some sort of brand name or store name it will be able to charge a slightly increased price, but yet a very high increase in price will result in decrease of its market share. As firms have a very limited control on price to gain more consumers firms are involved in strong non-price competition of quality, advertising, packaging, promoting brand names, etc… To enter into a monopolistic market is relatively easy as there is no established market. Examples of this...
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...Introduction: Monopolistic competition is a type of imperfect competition such that many producers sell products that are differentiated from one another (e.g. by branding or quality) and hence are not perfect substitutes. In monopolistic competition, a firm takes the prices charged by its rivals as given and ignores the impact of its own prices on the prices of other firms. In the presence of coercive government, monopolistic competition will fall into government-granted monopoly. Unlike perfect competition, the firm maintains spare capacity. Models of monopolistic competition are often used to model industries. Textbook examples of industries with market structures similar to monopolistic competition include restaurants, cereal, clothing, shoes, and service industries in large cities. Monopolistically competitive markets have the following characteristics: * There are many producers and many consumers in the market, and no business has total control over the market price. * Consumers perceive that there are non-price differences among the competitors' products. * There are few barriers to entry and exit. * Producers have a degree of control over price. The long-run characteristics of a monopolistically competitive market are almost the same as a perfectly competitive market. Two differences between the two are that monopolistic competition produces heterogeneous products and that monopolistic competition involves a great deal of non-price competition, which is...
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...Unit 8 Assignment: Oligopoly and Monopolistic Competition and Product Differentiation Name: - Course Number: - Section Number: - Unit Number: - 8 Date: - Problem Dr. Fine and Dr. Feelgood are the only two medical doctors offering immediate walk-in medical services in the town of Springfield. That is, they operate in a duopoly. Each doctor can charge either a high price or a low price for a standard medical visit. The accompanying matrix shows their payoffs, in profits per patient (in dollars), for any choice that the two doctors can make. [pic] 1. Suppose the two doctors play a one-shot game—that is, they interact only once and never again. What will be the Nash (non-cooperative) equilibrium in this one-shot game? 2. Now suppose the two doctors play this game twice. Also, suppose each doctor can play one of two strategies: it can play either “always charge the low price” or “tit for tat”— that is, it starts off charging the high price in the first period, and then in the second period it does whatever the other doctor did in the previous period. Write down the payoffs to Dr. Fine from the following four possibilities: a. Dr. Fine plays “always charge the low price” when Dr. Feelgood also plays “always charge the low price.” |FIRST Period |Payoffs |SECOND Period |Payoffs |TOTAL Payoffs | | |Charges | ...
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...3.0 Introduction to Monopolistic & Oligopoly Competition In today’s business context, firms facing numerous challengers when considering enter into different market segments. Monopolistic competition is a market structure where varieties of firms compete in a marketplace by providing differentiated products (Kumar and Chatterjee, 2015). Besides, an oligopoly competition involved the domination of a few firms in the market where producers offer homogeneous or differentiated product to a large number of consumers (Wen and David, 2001). 3.1 Characteristic of Monopolistic Competition Monopolistic competition is characterized by many sellers in the market; involving numerous independent firms competing in the market lead to a high degree of competition. On the other hand,...
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...Assignment #2 – Market Structure: Monopoly and Monopolistic Competition ECO550: Economics for Managers Assignment 2 Office building maintenance plans call for the stripping, waxing, and buffing of ceramic floor tiles. This work is contracted out to office maintenance firms, and both technology and labor requirements are very basic. Supply and demand conditions in this perfectly competitive service market in New York are: |QS = 2P - 20 |(Supply) | | | | |QD = 80 - 2P |(Demand) | where Q is thousands of hours of floor reconditioning per month, and P is the price per hour. |A. |Algebraically determine the market equilibrium price/output combination. | When calculating for equilibrium, QS = QD 2P – 20 = 80 – 2P 4P = 100 P = 25 When substituting the value of P in the equation for supply and demand, we calculate the value of Q as QS = 2P – 20 QS = 2*25 – 20 QS = 30 Equating both supply and demand and solving it for Q 2p+2p=80+20 4p = 100 P = $25 Q = 30 (thousands of hours) |B. |Use a graph to confirm your answer. | ...
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...Company Overview Coca Cola is a US publicly traded company, with many locations outside of North America. Coca Cola operates in Central and Southern Europe, German, Iberia, and North West Europe. Their brand stretches wide and encompasses continents (The Coca Cola Company). “Coca Cola originated as a soda fountain beverage in 1886 selling for five cents a glass”(The Coca Cola Company). Although its growth was remarkable, more was needed for it to become a household brand. Once the bottling system was developed, Coca Cola flourished and became a world famous brand (Coca Cola Company). Two young attorneys decided that they would build a business around bottling Coca Cola. They had a meeting with Asa G.Candler , a natural born salesman, who transformed Coca-Cola from an invention into a business”(Scribd). They then bought the exclusive rights to bottle Coca Cola for one dollar. Soon thereafter, another lawyer joined the venture. They were on a mission to sell the bottling rights to local entrepreneurs. They divided the country and began their journey to make Coca Cola one of the greatest brands of our time. Not only did they stop at Coca Cola, they added new brands such as: Fanta, Sprite, Minute Maid, Mr Pibb, Cherry Coke, Powerade, Dasani, and many more (Coca Cola Company). “As technology led to a global economy, the retailers who sold Coca Cola merged and evolved into international mega chains”(Coca Cola Company). There were changes in the market due to politics...
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...Economics and Ethical Issues BUS508 The Business Enterprise Introduction In this paper, I will discuss two types of businesses, homemade pies and soft drinks. Mrs. Acres Homemade Pies is small business that produces specialty pies to local supermarkets and select family restaurants. This company is growing rapidly in profits and employees (Ferrell, 2009). I am going to analyze the supply and demand for this company along with pointing out challenges Mrs. Acres should consider in managing the growth of her business. The next business that I will discuss is a soft drink company that operates in a monopolistic competition market. Monopolistic competition exists when multiple businesses are selling the same goods with very small differences (Ferrell, 2009). I will discuss the economic factors needed to operate this type of business and identify how each factor could give the business a competitive advantage. Mrs. Acres Homemade Pies Mrs. Shelly Acres love for cooking motivated her to start her own business called Mrs. Acres Homemade Pies. Mrs. Acres had taken her grandmother’s homemade pie recipe and turned it into a successful pie business. Mrs. Acres sells her pies to local supermarkets and select family restaurants for $4.50 each (Ferrell, 2009). During the first six months, Mrs. Acres produced 2000 pies each month. Her success comes from three productive part time employees who produced...
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...PFIZER’S POWER: Pfizer is one of the largest pharmaceutical companies in the world. Their enormous size and well-know products allow Pfizer to control much of the pharmaceutical industry. They base their company on research throughout the world in order to discover and expand new products. Pfizer’s products can increase the quality of life in living with a medical disorder or actually cure the sickness. The company believes it has the tools to lead the way into the next generation of the industry. Growth and pertinent resources will allow Pfizer to bring consumers the opportunity of better health and well-being. They influence health in over 150 countries and strive to enhance the health of humans in underdeveloped countries. Pfizer seeks to achieve these goals by specializing into four separate groups: Pharmaceuticals group, Consumer Healthcare, Global Research and Development and Animal Health Group. (www.pfizer.com) GROUPS: | FUNCTION: | Pharmaceutical | Produce and market pharmaceutical products | Consumer Healthcare | Produce goods to meet consumer demands including both over-the-counter and generics | Global R&D | Scientists research and produce innovative drugs. | Animal Health | Develop and market drugs to help improve the health of animals | PFIZER’S FOUR GROUPS: 1. Pharmaceutical Group: The Pfizer Pharmaceutical Group produces five of the world’s top-selling medicines, and nine are #1 in their therapeutic class in the U.S. market. Eight...
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...for themselves. In this busy schedule, the introduction of low calorie microwavable food has lives of people much more easier. These products are easily consumable and hence have become very popular. As discussed in assignment 1, the market structure (or selling environment) was perfectly competitive. In a perfectly competitive market there are a large number of buyers and sellers. The products sold in this market are perfectly homogeneous. Examples of perfect competition are vegetable market, market for cereals etc. In a real world situation, there are many sellers of low calorie microwavable food. If we observe the demand side, we can also find a large number of buyers in the market. With large number of buyers and sellers, if we examine the nature of the product, then we can see that the products are almost homogeneous. The main characteristics of perfect competition are: i. Many buyers and sellers ii. Free entry and exit iii. Information is perfect iv. Homogeneous product Now, firms under perfect competition have no market power and hence cannot affect the market price. They are bound to sell at the ongoing market price. But recently, it has been observed that the characteristics of the market are changing. Since the tastes of people are different, there is a lot of scope for product differentiation in this market. The sellers are also taking the advantage of this taste differentiation and are differentiating their product. Thus the sellers of the microwavable food...
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