Monopolistic Competition:

1
Chapter 12

• Monopolistic Competition
• Similar to PC
• 1. Large firms.
• 2. Free entry of new firms.
• Different from PC
• 1. Product is differentiated (I.e., brands ?
  advertising important.).
• Rule ? product diff. ? ? mkt power.
• Key products sold by diff. firms can be
  substitutes for one another (but not perfect
  substitutes).
• Result firm faces relatively elastic demand
  curve but still down-sloped (in between that of
  PC and that of monopoly).

2
See in Figure 12.1

• SR equilibrium pick q where MR MC get price
  off of demand curve ? P?ATC so ? ? 0.
• LR firms CAN enter, which shifts D and MR
  downward until get zero profits.
• MC and Inefficiency (Fig. 12.2)
• 1. P ? MC ? deadweight loss.
• 2. Where P AC, not at min of AC so could ? AC
  by ?q (firm operates with excess capacity).

3
Oligopoly

• 1. Few firms account for all or most of
  industrys production.
• 2. Product may or may not be differentiated.
• 3. Barriers to entry can cause positive profits
  in LR.
• 4. Examples cars, steel, aluminum, computers.

4
More on Oligopoly

• Key to firms decision-making because small
  firms, each firm cares what other firms are
  doing.
• Game theory math used to model different
  versions of oligopolies, each based on diff.
  assumptions regarding how one firm thinks about
  expected behavior of other firms and how one firm
  responds to other firms.
• Nash Equilibrium each firm is doing the best it
  can, given what its competitors are doing
  (non-cooperative equilibrium).