Monopolistic Competition

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Mrs.ET Sopheak

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Monopolistic competition

Essential Keys: Finding a Monopolist’s Output, Price, and Profit 

To find a monopolist’s level of output, price, and profit,  follow these four steps:
1. Draw the marginal revenue curve.
2. Determine the output the monopolist will produce: The profit-maximizing level of output is where the MR  and  MC  curves intersect. 
3. Determine the price the monopolist will charge:  Extend a line from where  MR= MC  up to the demand curve. Where this line intersects the demand curve is the  monopolist’s price. 
4. Determine the profit the monopolist will earn: Subtract the  ATC  from price at the profit-maximizing level of  output to get profit per unit. Multiply profit per unit by quantity of output to get total profit.

Summary of Monopolistic competition

The monopolist uses the general rule that any firm must follow to maximize profit: Produce the quantity at which  MC =  MR

• If  MR > MC  ,  the monopolist gains profit by increasing output. 
• If  MR < MC  ,  the monopolist gains profit by decreasing output.
• If  MC = MR  ,  the monopolist is maximizing profit.

Thus,  MR= MC  is the profit-maximizing rule for a monopolist.

Monopolistic competition  is  a market structure in which there are many firms selling differentiated products and few barriers to entry.  The four distinguishing characteristics of monopolistic competition are:  
1. Many sellers: When there are only a few sellers, it’s reasonable to explicitly take into account your competitors’ reaction to the price you set. When there are many sellers, it isn’t. In monopolistic competition, firms don’t take into account rivals’ reactions.
2. Differentiated products: The “many sellers” characteristic gives monopolistic competition its competitive aspect. Product differentiation gives it its monopolistic aspect. In a monopolistically competitive market, the goods that are sold aren’t homogeneous, as in perfect competition; they are differentiated slightly
3. Multiple dimensions of competition: In perfect competition, price is the only dimension on which firms compete; in monopolistic competition, competition takes many forms. These multiple dimensions of competition make it much harder to analyze a specific industry, but the alternative methods of competition follow the same two general decision rules as price competition(comparing marginal costs and marginal benefits; and changing that dimension of competition until marginal costs equal marginal benefits.
4. Easy entry of new firms in the long run: Barriers to entry create the potential for long-run economic profit and prevent competitive pressures from pushing price down to average total cost. In monopolistic competition, if there were long-run economic profits, other firms would enter until no economic profit existed.

Monopolistic Competition (Figure above)
In ( a)  you can see that a monopolistically competitive firm prices in the same manner as a monopolist. It sets quantity where marginal revenue equals marginal cost. In ( b ) you can see that the  mono polistic competitor is not only a monopolist but also a competitor. Competition implies zero economic profit in the long run.

 A Comparison of Perfect and Monopolistic Competition

The perfect competitor in long-run equilibrium produces at a point where  MC= P= ATC.  At that point,  ATC  is at its minimum. A monopolistic competitor produces at a point where  MC= MR.  Price is higher than marginal cost. For a monopolistic competitor in long-run equilibrium: 

(P= ATC) is  bigger than or equal to (MC= MR) 

At that point,  ATC  is  not  at its minimum.

Thanks,

Mrs.ET Sopheak

Lecturer in Economics