C h a p t e r twelve © 2006 Prentice Hall Business Publishing Economics R. Glenn Hubbard, Anthony...

c h a p t e rc h a p t e r

twelvetwelve

© 2006 Prentice Hall Business Publishing Economics R. Glenn Hubbard, Anthony Patrick O’Brien—1 st ed.

Prepared by: Fernando & Yvonn Quijano

Monopolistic Competition:The Competitive Model in a More Realistic Setting

2 of 19© 2006 Prentice Hall Business Publishing Economics R. Glenn Hubbard, Anthony Patrick O’Brien—1 st ed.

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After studying this chapter, you should be able to:

Explain why a monopolistically competitive firm has a downward-sloping demand curve.

Explain how a monopolistically competitive firm decides the quantity to produce and the price to charge.

Analyze the situation of a monopolistically competitive firm in the long run.

Compare the efficiency of monopolistic competition and perfect competition.

Define marketing and explain how firms use it to differentiate their products.

Identify the key factors that determine a firm’s profitability.

Starbucks: Growth through Product Differentiation

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…the coffeehouse market is monopolistically competitive, rather than perfectly competitive.

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gMonopolistic Competition:

The Competitive Model in a More Realistic Setting

Monopolistic competition A market structure in which barriers to entry are low, and many firms compete by selling similar, but not identical, products.

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The Demand Curve for a Monopolistically Competitive Firm

12 - 1The Downward-Sloping Demand for Caffe Lattès at a Starbucks

Demand and Marginal Revenue for a Firm in a Monopolistically Competitive Market

LEARNING OBJECTIVE1

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gDemand and Marginal Revenue for a Firm in a

Monopolistically Competitive Market

Marginal Revenue for a Firm with a Downward-Sloping Demand Curve

Demand and Marginal Revenue at a Starbucks

12 – 1

CAFFÈ LATTES SOLD PER WEEK

(Q)PRICE

(P)

TOTAL REVENUE

(TR = P x Q)

AVERAGEREVENUE

(AR – TR/Q)

MARGINAL REVENUE

(MR = ΔTR/ΔQ)

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$6.00

5.50

5.00

4.50

4.00

3.50

3.00

2.50

2.00

1.50

1.00

$0.00

5.50

10.00

13.50

16.00

17.50

18.00

17.50

16.00

13.50

10.00

-

$5.50

5.00

4.50

4.00

3.50

3.00

2.50

2.00

1.50

1.00

-

$5.50

4.50

3.50

2.50

1.50

0.50

-0.50

-1.50

-2.50

-3.50

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gDemand and Marginal Revenue for a Firm in a

Monopolistically Competitive Market

12 - 2How a Price Cut Affects a Firm’s Revenue

Marginal Revenue for a Firm with a Downward-Sloping Demand Curve

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gDemand and Marginal Revenue for a Firm in a

Monopolistically Competitive Market

Marginal Revenue for a Firm with a Downward-Sloping Demand Curve

12 - 3The Demand and Marginal Revenue Curves for a Monopolistically Competitive Firm

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gLEARNING OBJECTIVE2

12 - 4Maximizing Profit in a Monopolistically Competitive Market

How a Monopolistically Competitive Firm Maximizes Profits in the Short Run

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g What Happens to Profits in the Long Run?

LEARNING OBJECTIVE3

How Does Entry of New Firms Affect the Profits of Existing Firms?12 - 5

How Entry of New Firms Eliminates Profits

Don’t Confuse Zero Economic Profit with Zero Accounting Profit

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g What Happens to Profits in the Long Run?How Does Entry of New Firms Affect the Profits of Existing Firms?

The Short Run and the Long Run For a Monopolistically Competitive Firm

12 – 2

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The Rise and Fall of Apple’s Macintosh Computer

12 - 1

Macintosh lost its differentiation, but still has a loyal – if small – following.

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The Short Run and the Long Run for the Macintosh

12 - 2

LEARNING OBJECTIVE3

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g What Happens to Profits in the Long Run?

A firm’s profits will be eliminated in the long run only if the firm stands still and fails to find new ways of differentiating its product or fails to find new ways of lowering the cost of producing its product.

Is Zero Economic Profit Inevitable in the Long Run?

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Staying One Step Ahead of the Competition: Eugène Schueller and L’Oréal

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Unlike many monopolistically competitive firms, L’Orèal has earned economic profits for a very long time.

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gComparing Perfect Competition and Monopolistic Competition

12 - 6Comparing Long-Run Equilibrium under Perfect Competition and Monopolistic Competition

LEARNING OBJECTIVE4

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gComparing Perfect Competitionand Monopolistic Competition

The profit-maximizing level of output for a monopolistically competitive firm comes at a level of output where price is greater than marginal cost and the firm is not at the minimum point of its average total cost curve.

Excess Capacity under Monopolistic Competition

Consumers benefit from being able to purchase a product that is differentiated and more closely suited to their tastes.

How Consumers Benefit from Monopolistic Competition

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Abercrombie and Fitch: Can the Product Be Too Differentiated?

12 - 3

Did Abercrombie and Fitch narrow its target market too much?

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g How Marketing Differentiates Products

LEARNING OBJECTIVE5

Marketing All the activities necessary for a firm to sell a product to a consumer.

Brand Management

Brand Management The actions of a firm intended to maintain the differentiation of a product over time.

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g What Makes a Firm Successful?

LEARNING OBJECTIVE6

12 - 7What Makes a Firm Successful?

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Midnight Snack

Figure 1: Product differentiation shifting the demandcurve for a monopolistic competitor

Figure 2: “Spreading the overhead”

21 of 19© 2006 Prentice Hall Business Publishing Economics R. Glenn Hubbard, Anthony Patrick O’Brien—1 st ed.

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Brand management

Marketing

Monopolistic Competition