Monopolistic Competition.pptx for Marketing strategy

Monopolistic competition for blending MS

1. Monopolistic Competition It is a blending of monopoly and competition. Monopolistic competition is a type of imperfect market structure in which there are many small sellers of differentiated but with similar not identical  (not perfect substitute products . The only difference between perfect competition and monopolistic competition is the product differentiation that gives monopolistic competitors some degree of market power that make them to be price-setters.

2. Ch-Ch of Monopolistic Competition Many small firms but having some degree of pricing power D ecisions of any one firm will have little or no effect on other firms. Differentiated product with physical, imaginary, quality or purchase benefit and f ocuses on branding, customer loyalty Heavy investment in product development and advertising and increase the variety of their products to appeal to their target markets Non-price competition: Competing on Quality and Marketing Barriers to entry and exit are low  no economic profit in the long-run.

3. Advertising Advertising is an important non‑price method of competition. A successful advertising campaign can increase demand and decrease its elasticity by convincing buyers that a firm’s product is truly different thus enhancing revenues and profits. The degree to which advertising impacts demand varies from market to market. Price Quantity D BEFORE ADVERTISING D AFTER ADVERTISING

4. Equilibrium output is where profits are maximized at a point where MR = MC. If the MR > MC  output expansion. If MR < MC  reduce output volume until equilibrium. Each firm is sensitive to the average market price , but each firm pays attention to the actions of the other, and no one firm’s actions directly affect the actions of other firms. Collusion, or conspiring to fix prices , is impossible. Output and Pricing Determination

5. Short-Run Equilibrium Each firm has a downward-sloping demand curve for its own product because firms produce differentiated products. In the short run, profits are maximized when MR=MC A firm can make profits or losses, will probably not last long because there is free entry and exit in the long run . If there is economic profit, new firms will enter to the market. And the demand curves for each of the existing firms will fall and become more elastic due to increasing substitutes. This decline in demand continues until ATC becomes tangent with the demand curve, and economic profits are reduced to zero.

6. Short-Run Equilibrium Economic Lose Economic Profits Price Price (Loss Minimizing Output) Quantity P * C MR MC D (Profit Maximizing Output) Quantity q * P * C MR D ATC ATC MC A B B A q * If there is economic losses, some firms will exit the industry; The demand curves for the remaining firms shift to the right and makes them more inelastic due to reduced substitutes. The higher demand results in smaller losses for the existing firms until the losses disappear where the ATC curve is tangent to the demand curve.

7. Example 1. Suppose the inverse demand function for a monopolistically competitive firm’s product is given by P=100-2Q and the cost function is given by C(Q)=5+2Q. Determine the profit –maximizing price and quantity and the maximum profits. Solution : using the MR=MC. TR=PQ=(100-2Q)Q=100Q-2Q 2 MR= First derivative of TR i.e. MR=100-4Q, Similarly MC is the first derivative of TC. Hence MC=2. Profit is maximized at MR=MC MR=MC  100-4Q=2 and Q=24.5 P=100-2(24.5)=51. Profit=TR-TC=PQ-(5+2Q)=51(24.5)-(5+2(51))= 1,195.50

8. Long run profit and equilibrium In the short run, equilibrium is attained when MR=MC. However, in the long run, both the conditions (MR=MC and AR=AC) must hold (P=LAC ). Long‑run equilibrium will occur when demand is equal to average total cost for each firm at a level of output at which each firms’ demand curve is just tangent to its ATC curve. The point of tangency will always occur at the same level of output as where MR = MC . New entrants will continue to enter as long as there are economic profits. As soon as profits are taken away by new firms, equilibrium will be attained in the market and no new firms will be attracted to the market which is the only equilibrium consistent with low barriers to entry.

9. Market Entry and Exit in the Long Run Price Quantity q * P LR = ATC MR D LONG RUN D SHORT RUN MC ATC P LR = ATC Quantity MR MC ATC D SHORT RUN D LONG RUN q * Short Run Profit Short Run Loss

10. 10 Inefficiencies in monopolistic competition Firms in monopolistic competition operate excess capacity  resulting in idle capacity. Don’t operate at the minimum ATC in the long run. They waste resources on selling cost like advertising and promote their products. Their prices are higher than marginal costs.

11. 11 Exercise A monopolistically competitive firm has a total cost function and demand function, respectively, as TC = 200 − 10Q + 2Q 2 , P = 120 − 2Q. What are the equilibrium quantity and price? How much profit would the firm make? If the demand function changes over time to: Q = 70/6 − 1/6P, would the firm still earn profit? What can be said about short run and long run? (hint in long run Economic profit=0)