The first alternative is in spirit of traditional definition of a âlarge groupâ. Chamberlinian monopolistic competition, according to which all firms earn zero profit in ... In their original (1977) paper DS let the total cost of producing produc
welfare economics is whether a market solu- tion will yield ... expect a market solution to be suboptimal. However ...... is produced in monopolistically competitive.
erogeneous firms have changed the way econo- ... mainly centered on whether firm heterogeneity .... good under perfect competition and constant re- turns to ...
Product Selection, Fixed Costs, and Monopolistic Competition .... firms. And we define a local maximum of T(x) to be a point, x, such that no single quantity ...... brands are managed by independent managers who compete with each other other ...
ABSTRACT: We analyze the effects of market structure on the branching decisions of three types of depository institution: multimarket banks, single-.
Sep 17, 2011 - The recent availability of trade data at a firm-product-country level calls for a ... Keywords: Heterogeneous firms - Product Differentiation - Monopolistic Competition - Non- ... because it allows for a precise definition of products'
by adopting the Monopolistic Competition point of view [see for example. Stigler (1968, p. .... the output of this firmo If the n-1 remaining firms produce their goods with an identical ... differentiated commodity and quality as years in storage. Di
of imperfect competitionâmonopolistic competition and oligopoly. This chapter addresses monopolistic competition while the final chapter in the sequence addresses oligopoly. The analysis in this chapter is again based on the cost curves developed i
are willing to become entrepreneurs. Contrary, we are able to show that the risk premium even vanishes under the regime of monopolistic competition.
In this paper the monopolistic competition model of Dixit and Stiglitz for the goods market ... 2 See the notes on the literature after every chapter of Pissarides' book. ..... est decreases wages and the tightness ratio.16 The impact on the size and
A Particular Equilibrium Version of The Monopolistic Firm ... Equilibrium in the Case of Pessimistic Expectation. 9. 3-3. Equilibrium in the Case of Optimistic Expectation. 11 .... has in his mind the interrelationship between the market demand sched
Keywords: Monopolistic competition and trade; New Trade Theory; Gravity ... the correlation between countries' volume of trade and their size, not by the ...
L) are represented by a CES utility function: ( ). 1. 1. 1. 1 .... Observing that the CES indirect utility ... W so as to maximize the following expression subject to (11):.
Keywords: Efficiency, Productivity, Social welfare, Demand elasticity, Markups. .... Free entry ensures the wedge between prices and average costs exactly ...
Competition, Product Differentiation and Quality Provision: An Empirical Equilibrium Analysis of Bank Branching. Decisions. Andrew Cohen and Michael J. Mazzeo. 2004-46. NOTE: Staff working papers in the Finance and Economics Discussion Series (FEDS)
Nov 12, 2015 - Policies that encourage school competition in hopes of improving school ...... in Punjab province, data from the National Educational Census.
Abstract. Empirical work has drawn attention to the high degree of productivity differences within industries, and its role in resource allocation. This paper examines the allocational effi- ciency of such markets. Productivity differences introduce
Feb 15, 2005 - In the Dixit-Stiglitz model of monopolistic competition, entry of firms is socially too ... the cost structure and workers's rents can also explain excess entry. *We thank C. ..... numerical simulations are needed. Yet we are able to .
Are the products supplied by the right set of firms, or are there .... characterize the optimality properties of a general demand system derived from separable .... production of the differentiated varieties under monopolistic competition. The.
Why does the fraction of firms that export vary with countries' comparative advantage? To address this question, I develop a general-equilibrium Ricardian model of North-South trade in which both institutional quality and firm heterogeneity play a ke
two-sector model in which a monopolistically competitive market is considered. .... Second, our numerical results show that a rise in public spending financed by ..... substituting solution for cN , equation (8b), into price elasticity definition (10
market structure in that sector includes Dixit and Stiglitz  preferences ... monopolistically competitive firms producing a specific good indexed by z â [0, 1].
Jan 29, 2004 - For plausible values of this relative aversion, macroeconomic performance ...... Blanchard O. and S. Fischer (1989), Lectures in Macroeconomics, The MIT ... Available on the web at: http://www.tau.ac.il/~alexcuk/pdf/ccdmu5-.
utility function u(Â·) is strictly increasing and concave, and is at least thrice ... Utility maximization subject to a budget constraint implies u/(c) = Î»(p)p, where p.
The three conditions for monopolistic competition are (1) a large number of producers, (2) differentiated products, and (3) free entry and exit. a. There are many bands that play at weddings, parties, and so on. There are no significant barriers to entry or exit. And products are differentiated by quality (for instance, some bands have better musicians or better electronic equipment) or by style (for instance, different bands play different types of music). All three conditions for monopolistic competition are fulfilled. b. The industry for individual-serving juice boxes is dominated by a few very large firms (for example, Minute Maid, Welch’s, and Kool Aid), and there are significant barriers to entry, in part because of the large costs (for example, advertising) involved in gaining any market share of the national market. Products are, however, differentiated—if perhaps only in the minds of consumers. Because of the small number of competitors, the industry is closer to oligopoly. c. There is a large number of dry cleaners, and each produces a product differentiated by location: customers are likely to prefer to use the dry cleaner closest to their home or workplace. Finally, there are no significant barriers to entry. This is a monopolistically competitive market.
Monopolistic Competition and Product Differentiation
d. There is a large number of soybean farmers, and there is free entry and exit in this industry. However, soybeans are not differentiated from each other—they are a standardized product. No individual soybean farmer has market power. This industry is therefore a perfectly competitive industry.
There are three ways in which you can differentiate your product: by style or type; by location; and by quality. If you decide to copy Starbucks both in style (for example, you copy the décor of the shop and the service) and in quality (for example, you serve coffee made from the same coffee beans, brewed in exactly the same way), you will still most likely differentiate your product by location: your coffee shop will be closer for some people than any of the other shops, and that gives you some degree of market power. But you could further differentiate your product by style (for example, you could serve coffee in porcelain cups brought to the table by waiters) or by quality (for example, you could serve only organic shade-grown coffee). All these will help you create a differentiated product that gives you more market power—that is, the power to raise prices. You would, of course, need to determine whether it allows you to raise prices sufficiently to cover the cost of paying for waiters and higher-quality coffee.
She should not lower her price. Since the industry is in long-run equilibrium, each restaurant makes zero profit. That is, the restaurant’s demand, marginal revenue, marginal cost, and average total cost curves are as shown in the accompanying diagram. Price, costs, marginal revenue
PMC ATC1 P1
The restaurant owner produces output (the number of tables served), QMC, at a price of PMC. The price is equal to average total cost, and she therefore makes zero profit. If she were to lower the price to P1, she would attract more customers and sell the minimum-cost output Q1. That is, there is excess capacity: each restaurant in town could produce more output at a lower average total cost. But lowering the price to P1 would cause the restaurant owner to incur a loss equal to the shaded rectangle in the diagram, since price is now below average total cost, ATC1. In fact, there is no price other than PMC at which the restaurant owner does not make a loss. She should therefore not change the prices on her menu.
Each gas station will produce the output, and therefore charge the price, that maximizes its profit or minimizes its loss. That is, it will produce quantity QU, where marginal cost equals marginal revenue, and therefore charge price PU. Since the price PU is lower than average total cost at the quantity QU, ATCU, each gas station makes a loss. That is, the situation for the typical gas station looks like the diagram below. Price, costs, marginal revenue ATCU
Since gas stations are making losses, in the long run some will exit the industry. This shifts the demand and marginal revenue curves for each of the remaining gas stations rightward. Exit continues until each remaining gas station makes zero profit. This is the long-run equilibrium. The situation for the typical gas station in this equilibrium is illustrated in the accompanying diagram. Demand has increased to the level at which this gas station makes zero profit at a price of PMC and a quantity of QMC . Price, costs, marginal revenue
PMC = ATCMC
M O N O P O L I S T I C C O M P E T I T I O N A N D P R O D U C T D I F F E R E N T I AT I O N
Your hairdresser currently makes a profit. His demand, marginal revenue, marginal cost, and average total cost curves are shown in the diagram below. Price, costs, marginal revenue
DP MRP Quantity
Since this hairdresser (and all other hairdressers) makes a profit equal to the shaded rectangle by producing quantity QP at a price PP, there will be entry into this industry. As more hairdressers open shops in town, demand for the typical existing hairdresser will fall—the demand curve and marginal revenue curve shift leftward. This will continue to the point at which no hairdresser makes positive profit. This eliminates the incentive for further entry into the industry and long-run equilibrium is reached. The situation is illustrated in the diagram below. Price, costs, marginal revenue
PMC = ATCMC
The best the typical hairdresser can do is to produce quantity QMC at a price of PMC . Since price equals average total cost at this quantity, each hairdresser will make exactly zero profit.
The current situation of Magnificent Blooms is illustrated in the accompanying diagram. It produces quantity Q1 at the minimum point of its average total cost curve, and it charges price P1, thus making profit equal to the shaded rectangular area. Price, costs, marginal revenue
PP P1 ATCP ATC1
a. Yes, Magnificent Blooms could increase its profit in the short run by producing less. It would maximize its profit by producing quantity QP, the quantity at which marginal revenue equals marginal cost, and selling it at a price PP and making a profit equal to the striped area. b. No. In the long run, Magnificent Blooms will make zero profit. The fact that it is making profits in the short run induces other firms to enter the industry. This shifts its demand curve leftward and marginal revenue curve to the point where it makes zero profit, as shown in the accompanying diagram. Price, costs, marginal revenue
PMC = ATCMC
This statement is false for the following reasons. a. The price charged to consumers is higher in monopolistic competition than it is in perfect competition. All firms in a perfectly competitive market will charge a price equal to marginal cost and equal to minimum average total cost, the lowest point on the average total cost curve. The typical firm in a monopolistically competitive industry will charge a price that is higher than marginal cost and also higher than minimum average total cost. b. The average total cost of production is higher for a monopolistically competitive firm than for a perfectly competitive firm. For a perfectly competitive firm in the long run, there is no way of lowering the average total cost of production: it produces at minimum average total cost. Monopolistically competitive firms, however, have excess capacity: if they were to produce more, they could lower their average total cost, but this would result in a reduction in profit or a loss.
M O N O P O L I S T I C C O M P E T I T I O N A N D P R O D U C T D I F F E R E N T I AT I O N
c. The market outcome under perfect competition is clearly efficient: price equals marginal cost, so no firm wants to produce more output at a price at which consumers want to buy more output. That is, no mutually beneficial trades between consumers and producers go unexploited. The efficiency of monopolistic competition, however, is ambiguous. In the market outcome, price exceeds marginal cost, so there are beneficial trades that go unexploited in this case. But consumers also gain from the variety of products that monopolistic competition provides, but perfect competition does not. So it is ambiguous whether consumers are better or worse off when an industry is monopolistically competitive. d. In this respect, perfect competition and monopolistic competition are similar. Both perfectly competitive firms and monopolistically competitive firms earn zero profits in the long run, since entry into (or exit from) the industry eliminates all profits (or, in the case of exit, transforms losses to zero profit).
In the short run, a monopolist makes positive profit. Whether a firm in monopolistic competition makes profit depends on how many firms there are in the industry. If there are “too few” firms in the industry (relative to the long-run equilibrium number of firms), then a typical firm in monopolistic competition will make a profit. But if there are “too many” firms in the industry (relative to the long-run equilibrium number of firms), then a typical firm in monopolistic competition will make a loss. In the long run, a monopolist also makes positive profit. But in the long-run equilibrium in a monopolistically competitive industry, all firms make zero profit. This is because in the long run, in a monopolistically competitive industry, enough firms have entered or left the market to shift a typical firm’s demand curve so that it is tangent to the firm’s average total cost curve at the firm’s profit-maximizing quantity. The typical firm makes zero profit.
a. In monopolistic competition, firms seek to differentiate themselves by, among other things, the type of clothes they sell. And to you, as a customer, there is value in diversity: many consumers value being able to wear clothes that are different from those the people around them wear. If there are fewer firms in this industry, there will also be less variety. b. Monopolistically competitive firms also seek to differentiate themselves through the quality of service they offer. There will be stores that take your measurements before making specific recommendations about which clothes to buy. And there will be stores where you help yourself to clothes piled in a heap on a big table. If there are fewer firms in this industry, there will be less diversity in service quality. It will be less likely that each consumer finds a store with just the quality of service he or she prefers. c. If there are fewer firms in this industry, each firm will sell a greater quantity and so have lower average total cost of production. As a result, it is likely that prices will also be lower. From this perspective, you might prefer to have fewer firms.
a. This commercial is not directly informative about the product since every car manufacturer can claim that its car is better than any other; this is not a statement that can be easily verified by the purchaser before purchase. However, Tiger Woods commands a very high fee for advertising. What the commercial therefore signals is something like “we can afford to pay Tiger Woods’s fee since we are a company with a superior product.” b. This ad is directly informative about the product. It states specific information (that, on inspection of the car, you could easily verify before purchase). Since it can be so easily verified, this information is likely to be true. c. This type of advertising provides indirect signal of the quality of McDonald’s food. By spending millions on advertising, McDonald’s signals that it is confident that once it attracts a buyer to its product, that buyer will buy its products again (creating more profit for McDonald’s in the future).
d. This type of advertising is directly informative about the product because it contains specific information that could easily be verified. If this claim were false, it would very quickly be discredited. So the claim is likely to be true and informs you directly about the product.
a. The seller here is the job-seeker, who is selling his or her labor to a potential employer. The potential employer lacks information on how good an employee the job-seeker is—how dependable, diligent, and so on. By being willing to provide excellent references from previous employers, the job-seeker signals that he or she is a good employee. As a result, the potential employer is more willing to hire that person. b. The potential buyer lacks information on how good the merchandise is. By being willing to provide a one-year, no-questions-asked warranty, the seller signals to the potential buyer that the merchandise is of high quality. As a result, the potential buyer is more willing to buy the good. c. The potential buyer lacks information on how good the used car is. By being willing to provide the repair and maintenance records, the seller signals to the potential buyer that this is a good-quality used car. As a result, the potential buyer is more willing to buy it.
The fast-food industry is a monopolistically competitive one, and companies attempt to differentiate their product from that of other firms. McDonald’s invests money in maintaining its brand name that differentiates it from other companies. The amount of money spent on creating and maintaining a brand name does not convey any specific information about McDonald’s products. But it does convey, indirectly, that McDonald’s is in this market for the long haul, that it has a reputation to protect, and that it will interact repeatedly with its customers. In this sense, the amount of money spent on maintaining a brand name signals to you as a consumer that McDonald’s will provide products of consistent quality.