Firms face low entry barriers Differentiated Products - they face a downward sloping demand curve

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Monopolistic Competition. Firms face low entry barriers Differentiated Products - they face a downward sloping demand curve - no Long Run Profits -Non-price Competition Price Taker Many Small Firms. Product Differentiation. - PowerPoint PPT Presentation

Text of Firms face low entry barriers Differentiated Products - they face a downward sloping demand curve

  • Firms face low entry barriersDifferentiated Products-they face a downward sloping demand curve-no Long Run Profits-Non-price CompetitionPrice TakerMany Small FirmsMonopolistic Competition

  • Product DifferentiationPrice-searchers produce differentiated products products that differ in design, dependability, location, ease of purchase, etc.Rival firms produce similar products (good substitutes) and therefore each firm confronts a highly elastic demand curve.Advertising increases ATCThe goals of advertising are to increase demand and make demand more inelasticThe increase in cost of a monopolistically competitive product is the cost of differentness

  • Advertising and Monopolistic CompetitionAdvertising increases ATCThe goals of advertising are to increase demand and make demand more inelasticPerfectly competitive firms have no incentive to advertise, but monopolistic competitors doThe increase in cost of a monopolistically competitive product is the cost of differentness16-*

  • McHits or McMisses?Hulaburger - 1962Filet o Fish - 1963Strawberry shortcake - 1966Big Mac - 1968Hot Apple Pie - 1968Egg McMuffin - 1975Drive Thru - 1975Chicken McNuggets - 1983Extra Value Meal - 1991McLean Deluxe - 1991Arch Deluxe - 199655-cent Special - 1997Big Xtra - 1999McRib, Sundaes and others?McHorseburger - 2003

    Big MacBig N TastyBig N Tasty w/ CheeseQuarter Pounder w/ CheeseDouble Quarter Pounder w/ CheeseCrispy ChickenChicken McGrillFilet-O-FishDouble CheeseburgerCheeseburgerHamburgerChicken McNuggets (4)Chicken McNuggets (6)Chicken McNuggets (9)McSalad Shaker Chef SaladMcSalad Shaker Garden SaladMcSalad Shaker Grilled Chicken Caeser Salad

  • Fish Supreme Chicken Parmesan Sandwich 2/3 lb. Monster Thickburger 1/3 lb. Low Carb Thickburger Little Thick Cheeseburger 1/4 lb. Little Thickburger 1/3 lb. Cheeseburger Chili Cheese Thickburger 1/3 lb. Original Thickburger 1/3 lb. Mushroom 'N' Swiss Thickburger 1/3 lb. Bacon Cheese Thickburger Big Chicken Fillet Sandwich Charbroiled Chicken Club Sandwich Charbroiled BBQ Chicken Sandwich Big Hot Ham 'N' Cheese Regular Hamburger Regular Cheeseburger Double Cheeseburger 5-Piece Chicken Breast Strips 7-Piece Chicken Breast Strips Big Shef

    Double Jr. Cheeseburger Deluxe 1/4 lb.* Single 1/2 lb.* Double with Cheese 3/4 lb.* Triple with Cheese Baconator Jr. Hamburger Jr. Bacon Cheeseburger Jr. Cheeseburger Deluxe Jr. Cheeseburger Double Stack Deluxe Double Stack Triple Stack

    Homestyle Chicken Go Wrap Grilled Chicken Go Wrap Spicy Chicken Go Wrap Crispy Chicken Deluxe Chicken Club Ultimate Chicken Grill Spicy Chicken Sandwich Homestyle Chicken Fillet 10-piece Chicken Nuggets Premium Fish Fillet Sandwich Crispy Chicken Sandwich

  • Double Jr. Cheeseburger Deluxe 1/4 lb.* Single 1/2 lb.* Double with Cheese 3/4 lb.* Triple with Cheese Baconator Jr. Hamburger Jr. Bacon Cheeseburger Jr. Cheeseburger Deluxe Jr. Cheeseburger Double Stack Deluxe Double Stack Triple Stack

    Homestyle Chicken Go Wrap Grilled Chicken Go Wrap Spicy Chicken Go Wrap Crispy Chicken Deluxe Chicken Club Ultimate Chicken Grill Spicy Chicken Sandwich Homestyle Chicken Fillet 10-piece Chicken Nuggets Premium Fish Fillet Sandwich Crispy Chicken Sandwich

  • Price and OutputA profit-maximizing price searcher will expand output as long as marginal revenue exceeds marginal cost.Price will be lowered and output expanded until MR = MCThe price charged by a price searcher will be greater than its marginal cost.

  • dPriceQuantity/timeP2P1MRq1q2Marginal Revenue similar to Monopoly Initial price P1 & output q1. Total revenue (TR) = P1 * q1.1. As price falls from P1 to P2, output increases from q1 to q2, two conflicting influences on TR.1. TR will rise because of an increase in the number of units sold (q2 - q1) * P2.2. TR will decline [(P1 - P2) * q1] as q1 units once sold at the higher price (P1) are now sold at the lower price (P2). Depending on the size of the shaded regions, total revenue may increase or decrease.

  • dMRMCATCPrice and Output: Short Run ProfitQuantity/timeqC A monopolistic competitor maximizes profits by producing where MR = MC, at output level q and charges a price P along the demand curve for that output level. At q the average total cost is C. Because the price is greater than the average total cost per unit (P > C) the firm is making economic profits equal to the area ( [ P - C ] * q ) What impact will economic profits have if this is a typical firm?PriceP

  • Profits and Losses in the Long RunEconomic profits attract competition.New firms will expand supply and lower price.Individual demand curves will shift inward until the economic profits are eliminated.Economic losses cause firms to leave the market.Demand for the remaining firms output will rise until the losses have been eliminated, ending the incentive to exit.Firms can make either profits or losses in the short run, but only zero economic profit in the long run.

  • Because entry and exit are free, competition will eventually drive prices down to the level of ATC.Quantity/timeqPdMRMCATCPrice and Output: Long Run When profits (losses) are present, the demand curve will shift inward (outward) until the zero profit equilibrium is restored. The price searcher establishes its output level where MC = MR. At q the average total cost is equal to the market price. Zero economic profit is present. No incentive for firms to either enter or exit the market is present. Price

  • Entry or Exit?Supply ProfitsCase 1: Prices rise

  • PriceQuantity$6$5$4$3$2$11020304050600DemandSR Profits1. Increased Demand, Price goes up2. Firms enter, Demand faced by each firm decreases3. Price goes down4. No LR ProfitsATCMC

  • Entry or Exit?Supply ProfitsCase 2: Prices fall

  • PriceQuantity$6$5$4$3$2$11020304050600DemandSR Losses1. Demand falls, Price goes downATC2. Firms leave, Demand faced by each firm increases3. Price goes up4. No LR LossesMC

  • QPATCBreak evenQMCDMRA monopolistic firm can earn profits, losses, or break even in the short runDetermining Profits Graphically: Monopolistic CompetitionLossesBreak evenProfitsPATCLossesATCProfitsATCLATCP

  • dMCATCdMRMCATCP2q2P1q1LR equilibrium for both. P = ATC and there are no economic profits.In monopolistic competition, firms face a downward-sloping demand curve, its profit-maximizing price exceeds MC. In Monopolistic Competition, output is too small to minimize ATC in long-run equilibrium. Comparing Markets

  • dPriceMCATCdMCATCP2P1PriceMRq2q1Even though the two markets have the same cost structure, the price in the monopolistic competitors market is higher than that in the price-takers market ( P2 > P1 ).Some consider this price discrepancy a sign of inefficiency; others perceive it as a premium society pays for variety and convenience (product differentiation).Comparing Price Taker Markets

  • 1. Few Sellers2. Differentiated or Identical ProductsCharacteristics?4. Non-Price competition6. Price Maker3. Difficult Entry and Exit5. LR profits/losses

  • Oligopolies are made up of a small number of firms in an industryOligopolistic firms are mutually interdependentIn any decision a firm makes, it must take into account the expected reaction of other firmsOligopolies can be collusive or noncollusiveFirms may engage in strategic decision making where each firm takes explicit account of a rivals expected response to a decision it is making16-*

  • Empirical Measures of Industry StructureThe concentration ratio is a firms percentage of total industry salesThis gives more weight to firms with large market shares than does the concentration ratio measureThe Herfindahl index is the sum of the squared value of the a firms share in the industryconcentration ratio Herfindahl index

  • Concentration Ratios and the Herfindahl Index

    IndustryFour Firm Concentration RatioHerfindahl IndexPoultry46 773Soft drinks52 896Breakfast cereal78 2,999Soap and detergent38 664Mens footwear44 734Womens footwear64 1,556Pharmaceuticals34 506Computer equipment49 1,183Burial caskets73 2,965

  • Concentration Ratios and the Herfindahl Index - II

    IndustryFour Firm Concentration RatioHerfindahl IndexCigarettes99 not disclosedSugar refining99 not disclosedCopper95 2,390Glass containers91 2960Beer90 not disclosedSmall arms ammo90 not disclosedLight bulbs89 2849Aircraft85 not disclosedMotor vehicles82 2,506

  • Game Theory or Strategic InteractionCooperative games are games in which players can form coalitions and can enforce the will of the coalition on its membersSequential games are games where players make decisions one after another, chess, for exampleA non-cooperative game is a game in which each player is out for him- or herself and agreements are either not possible or not enforceableSimultaneous move games are games where players make their decisions at the same time as other players, for example, the prisoners dilemma

  • Strategies of PlayersA dominant strategy is a strategy that is preferred by a player regardless of the opponents move, prisoners dilemma, for exampleA mixed strategy is a strategy of choosing randomly among moves, for example, rock, paper, scissorsIn backward induction, you begin with a desired outcome and then determine the decisions that could have led you to that outcome11-*

  • DABChighhighlowlow$57$55$55$60$59$50$69$58

  • pricequantityD=ARCurrent Price and QuantityMRelasticinelasticP TRP TRMC1MC2MC3QP

  • a. Formal Agreement to set Pricesb. OPEC1. Overt Collusiona. Secret agreements2. Covert Collusionb. Electric switch makers in the 50s

  • Vickrey auctions are a sealed bid auct

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