Monopolistic Competition

Front 1

What are the characteristics of a monopolistic competition model? (6)

Back 1

- free entry/exit

- large number of buyers/sellers with little market power each

- firms produce differenciated goods

- there is perfect knowledge in the market

- firms maximise profits in the short run

- each firm has a downwards sloping demand curve because products are not homogenous so as price increases demand falls

Front 2

Examples of firms in monopolistic competiton?

Back 2

H&M, Zara, florist, hairdressers, restaurants

Front 3

Short run equilibirum position for a monopolistically competitive firm?

Back 3

firms can make a supernormal profit in the short run.

due to lack of barriers to entry, the supernormal profits attract new firms into the industry. so, as supply increases and market price falls, supernormal profits are competed away in the long run

this is because each firm's share of demand falls and the demand curve shifts to the left

Front 4

what determines how much supernormal profit is earned in the short run by mono comp?

Back 4

their ability to differenciate products by using brand names and advertising

Front 5

why are firms still allocatively inefficient in the short run?

Back 5

because p>mc

Front 6

Back 6

short run equilibrium position in monopolistic competition

Front 7

in the long run, where is the demand curve for mono comp?

Back 7

at a tangent to average cost

Front 8

why are monopolisticaly competitive firms productively inefficient in the long run?

Back 8

because firms dont produce at the lowest part of the AC curve which makes the firm productively inefficient as the firm has extra capacity (not producing along the PPC)

Front 9

In the long run, which two rules for monopolistic competition hold?

Back 9

AC=AR - because freedom of entry/exit ensures that firms cant make supernormal profits in the long run

MC=MR - because all firms are profit maximisers

Front 10

Explain the MC=MR long run rule for monopolistic comp?

Back 10

because all firms are profit maximisers

Front 11

Explain the AC=AR long run rule for monopolistic comp?

Back 11

freedom of entry/exit ensures that all firms cannot earn supernormal profits

Front 12

why is non price competition key in this market structure?

Back 12

as all firms produce differenciated products

Front 13

define price competition and all the types (5)

Back 13

the use of difference price strategies including:

- going rate

- loss leader

- penetration

- promotional

-psychological

Front 14

Explain going rate pricing as a method of price competition?

Back 14

price based on the average charged by all firms in the industry

Front 15

Explain loss leader pricing as a method of price competition?

Back 15

setting a price below cost price to entice consumers. these consumers then may also buy related and more expensive products by the same firm

Front 16

Explain penetration pricing as a method of price competition?

Back 16

used by new entrants to set a low introductory price when entering the market to establish market share

Front 17

Explain promotional pricing as a method of price competition?

Back 17

charging a low price to attract consumers to raise brand awareness and customer loyalty

Front 18

Explain psychological pricing as a method of price competition?

Back 18

£9.99 can seem a lot cheaper than £10

Front 19

What are the methods of non-price competition?(6)

Back 19

- ADVERTISING

- BRANDING, used to gain customer loyalty

- PACKAGING, distinguish products from one another and creates a selling point

- PRODUCT DEVELOPMENT, special features, limited edition

- QUALITY OF SERVICE

- QUALITY OF AFTER SALES SERVICE, warranty, technical support, delivery service

Front 20

Monopolistically competitive firms are neither EFFICIENTLY or ALLOCATIVELY productive in the SHORT OR LONG runs

Back 20

OK

Front 21

Why do inefficiencies occur in this market?

Back 21

due to the large amount of choice that consumers have

Front 22

why are these firms allocatively inefficient?

Back 22

these firms are price makers and have a small share of market power (much smaller than monopoly) so P>MC

price exceeds marginal cost = allocatively inefficient

Front 23

why are these firms not productively efficient?

Back 23

they do not produce on the lowest part of their average total cost curve as there are limited opportunities to exploit economies of scale

Front 24

perfect comp and monopolistic comp both have small producers

Back 24

SIMILARITY

Front 25

monopolistic comp can product differenciate but monopolists cannot do this because they are the only supplier

Back 25

DIFFERENCE

Front 26

choice is greater for consumers in monopolistic comp than in perfect comp (as firms only supply homogenous products in perfect comp)

Back 26

DIFFERENCE

Front 27

monopolistic comp can enjoy economies of scale although this is limited by the size of the firm and the differenciated products they supply

Back 27

POSITIVE

Front 28

firms in perfect comp are productively and allocatively efficient in the long run but those in monopolistic comp are not

Back 28

DIFFERENCE

Front 29

monopolist comp and monopoly are inefficient market structures

Back 29

SIMILARITY

Front 30

monopolistic comp firms have much less power than monopolies

Back 30

DIFFERENCE

Front 31

While competition is beneficial, natural monopolies avoid/eliminate wasteful competiton

Back 31

good

Front 32

both perfect comp and mono comp have barriers to entry/exit

Back 32

SIMILARITY

Front 33

monopolists can earn abnormal profits in the long run due to the nature of barriers to entry

Back 33

TRUE