Chapter 17-Monopolistic Competition

Marketing

Firms in monopolistic competition spend money advertising. Advertising allows the firm to distinguish their product from the competition. This is an additional cost of production that Perfect Competition and Monopoly do not have to incur. Total Cost of production will be higher here than other types of industries

The four-firm concentration ratio is the percentage of sales accounted for by the largest:

four firms in the industry

If a monopolistically competitive firm's demand curve is above its average total cost curve, then this firm is making:

positive economic profit

Monopolistically competitive firms have some control over price because:

the products they produce are differentiated

Long Run: Zero Economic Profit

As seen in perfect competition, profits and losses act as signals. •Profit signals entry •Loss signals exit • In the long run, firms make zero economic profit.

Which of the following types of firms use the marginal revenue equals marginal cost approach to maximize profits?

Both perfectly competitive and monopolistically competitive

What trade-offs do consumers face when buying a product from a monopolistically competitive firm?

Consumers pay a price greater than marginal cost but also have a wider array of choices.

Is Monopolistic Competition Efficient?

Deadweight Loss-An indicator of inefficiency. Making the Relevant Comparison-Price exceeds marginal cost because of product differentiation and consumers value variety. The Bottom Line-Competition forces zero economic profit in the long run. Monopolistic Competition is thought to be efficient.

The Firm's Profit-Maximizing Decision

Due to product differentiation, each firm has control over the Price and Quantity in order to maximize profits

Another measure of industry concentration is the:

Herfindahl-Hirschman Index

<Monopolistic Competition vs Perfect Competition

In monopolistic competition, there is •Underproduction •A price greater than marginal cost

Which of the following best describes the additional revenue associated with selling an additional unit of output?

Marginal revenue

What is the term given to all the activities necessary for a firm to sell a product to a consumer?

Marketing

Which type of efficiency is achieved by a monopolistically competitive firm in the long run?

Neither allocative nor productive efficiency

For what type of market structure is the demand curve the same as marginal revenue?

Perfect competition A perfectly competitive firm faces a horizontal demand curve and does not have to cut its price to sell a larger quantity. A monopolistically competitive firm, however, must cut its price to sell more units so the marginal revenue curve will slope downward and be below its demand curve.

Which of the following best describes how the product differentiation of monopolistically competitive firms may benefit consumers?

Product differentiation can locate firms more conveniently to consumers and offer versions of a product or service that better fits their needs.

Product Differentiation

Product differentiation is making a product that is slightly different from the products of competing firms. A differentiated product has close substitutes but it does not have perfect substitutes. Firms compete based on price, quality, reliability, etc.

Competing on Quality, Price, and Marketing

Quality: Design, reliability, after-sales service, and buyer's ease of access to the product. Price: Because of product differentiation, the demand curve for the firms' product is downward sloping.

Profit Maximizing Might Be Loss Minimizing

Some firms in monopolistic competition have a tough time making a profit.

Identifying Monopolistic Competition

The four-firm concentration ratio is the percentage of the value of sales accounted for by the four largest firms in the industry. •Between 0% and 100%

Large Number of Firms

Three implications are •Each company is a small fraction of the industry •No one firm has market dominance This makes it difficult for each company to keep up with what all of it's competitors are doing

Legally enforcing trademarks can be difficult.

U.S. firms lose hundreds of billions of dollars per year in sales worldwide as a result of unauthorized use of trademarked brand names. Enforcing trademark legislation is very difficult in some countries where the court system favors the domestic manufacturer.

The monopolistically competitive firm sells a __________ product and faces a __________ demand curve.

differentiated, downward-sloping

Monopolistic competition

is a market structure in which •A large number of firms compete. •No barriers to entry or exit •Each firm produces a differentiated product.

A monopolistically competitive firm in a long-run equilibrium produces where

its demand curve is tangent to its average total cost curve

A monopolistically competitive firm is characterized by the existence of many firms in the market, differentiated products and:

low barriers to entry

A monopolistically competitive firm produces where:

marginal revenue equals marginal cost