Chapter 11

Monopolistic Competition
Learning Objectives:
When you have completed this
chapter you will be familiar with:
1. The monopolistic competitor in the
short and long run.
2. Product differentation.
3. The characteristrics of monopolistic
competition.
4. Price discrimination.
 Monopolistic Competition Defined
A monopolistically competitive industry has many
firms selling differentiated product.
• differentiated means the buyer, for whatever reason, makes a
difference between one product and another.
• Identical means the buyer makes no difference between one product
and another product.
• No one firm has any significant influence on price.
The Monopolistic Competitor in
the Short Run
Can make a profit or take a loss.

As only one firm in a crowded industry it

has a very elastic demand curve

No one firm can get too far out of line on

a price because buyers can always
purchase a substitute from some one else
Monopolistic Competitor Making a
Profit in the Short Run
Monopolistic Competitor Taking a
Loss in the Short Run
Monopolistic Competitor Breaking
Even in the Long Run
Question for Further Thought and
Discussion
The Monopolistic Competitor vs. the
Perfect Competitor in the Long Run
Product Differentation
Product
differentation is crucial to
monopolistic competition.
• The monopolistic competitor tries to set
his/her product apart from the competition.
• Product differentation takes place in the
buyer’s mind.
• If a buyer sees no difference, there is no difference
• In the real world, biuyer usually do differentiate.
• Americans are provided with a wider variety
of products and service than people in other
countries
Advertsing and the Bases for Product Differentation

Advertising tries to make the demand

curve for the product more inelastic:
• Physical differences
• Convenience
• Ambience
• Reputations
• Appeals to vanity
• Unconcious fears desires
• Snob appeals
• Customized products
 Product Differences
 Productdifferentation does not necessarily
mean there are any physicial differences among
products.
• They might all be the same, but how they are sold
may make all difference.
 Thereare, of course, some very real physical
product differences
• Buyers often differentiate based on real physical
differences, but differentiation is still taking place in
the buyer’s mind, and it may or may not based on
real physical differences.
 Price Discrimination
 Price discrimination occurs when a seller
charges 2 or more prices for the same good or
service.
• Sometimes it’s bad and sometimes it’s not bad at all.
• Price discrimination is often disguised as subsidy to
the poor.
 Topractice price discrimination, sellerneeds to
be able to:
• Distinguish between atleast 2 sets of buyers.
• Prevent one set of buyers from reselling the product
to another set.
 Examples of Price Discrimation
 Doctors often charge risch patients more than
poor patients.
• They maynhave one price for those with insurance
and another price for those without insurance.
 Movies in the evening cost more than those in
the early afternoon
 Senior citizen, youth, and student discounts
 New and used cars
 Youth fares airlines
 Evening meals in restaurants often cost more
than the same meal in the lunch
Motives for Price Discriminstion
Inmost cases, price dicrimination is
basically a mechanism for rationing goods
and services.
The main motivation is to raise profits.
• The greater the price discrimination, the
greater the profits because buyers lose some
of their “consumer surplus”.
• If price discriminationwere carried to its
logical conclusion, we would have perfect
price discrimiati.
• Buyers would lose all their “consumer surplus”
Monopolistic Competitor charging
One Price
Monopolistic Competitor Practicing
Price discrimination
Is the Monopolistic Competitor
Inefficient?
 From a purely economic standpoint... Yes!
• Firms do not produce at the point of ATC.
• There may be too many firms in most industries.
• Are there too many beauty parlors? Not if you want to get your
hair done on Friday afternoon or Saturday morning.
• Are there too many restaurant? Not on Friday and Saturday
evening.
• There may probably be over-differentation.
• Would Americans want the drab businesses that
characterize Eastern Europe?
• Would Americans want only one brand of toothpaste or
one brand and model of a car?
• In America, it would be hard to imagine a no-frills
world.
Closing Thoughts
More than 99% over 39 million business
firms in the U.S. are monopolistic
competitors.

While monopolistic competitors do

complete with respect to price, they
compete still more vigorously with
respect to ambience, service, and the rest
of the intangibale that attract customers.
Current Issue: Selling Status
Starbucks does a great job of selling
status
• $2.20 for hot chocolate!?! Add a few cents
worth of white chocolate mocha and you get
to pay $1.00 more
• This enables Starbucks to 9smoke out the
customers who are less sensitive about price.
• But under what conditions can this continue?
Current Issue: Selling status
Some restaurants segregate diners by
status.
• There is usually a wait in the lower tiered
section of 15 mintes or more.
• The higher tiered gets immediate seating.
Why?
• The foods the same in both sections
• The price in the higher tiered section is twice what
is in the lowered tiered section.
• The bottom line is that by selling status you
can really boost your profits.