Monopolistic Competition

00:01 Hello and welcome back to your online presentation on Microeconomics.

00:04 My name is James DeNicco.

00:06 This presentation is gonna be about Monopolistic Competition.

00:10 So in this presentation we're gonna learn about what monopolistic competition is.

00:14 We're gonna learn about how market characterized as a monopolistic competition is different from perfect competition and for monopolies, it's kind of a hybrid of both, that shares characteristics with both.

00:26 We're gonna look at the implications of monopolistic competition for profits in the short and long run, and we're gonna look at the implications of monopolistic competition on economic well-being.

00:37 Alright, so first, what is monopolistic competition? It's a market structure in which we have many firms selling products that are similar but not identical.

00:49 So, like perfect competition we have many firms but unlike perfect competition we're gonna have slightly different products, so you can think of restaurants here.

00:59 So I have a picture of a food court with all kinds of different restaurants.

01:03 So fast food, you have a lot of different firms, Burger King, McDonalds, Wendy's, Chick-fil-A, all these different restaurants.

01:12 They're similar but the products are a little bit different.

01:15 There's a lot of firm selling fast food but people develop brand loyalties.

01:20 Some people like Burger King burgers better than McDonald burgers, so with that brand loyalty, you have some market power.

01:28 Unlike perfect competition, you have some market power and monopolistic competition.

01:32 It's not like -- a monopoly however, where you're the only game in town so in the long run, we're gonna see like perfect competition, there's gonna be zero profits in monopolistic competition.

01:44 So let's take a little look here, what are the attributes, alright, what are the attributes of a market characterized by monopolistic competition.

01:53 Alright, I've said there's many firms competing for the same costumers, alright.

01:58 However, there's product differentiation, they're slightly different products.

02:02 So rather than being a price taker, there are gonna have a downward sloping demand curve like in monopoly.

02:08 They have some power over the market because the products are slightly differentiated so you're gonna get some loyalty to your different producers, alright? We're gonna have free entry and exit here just like we have in perfect competition, however.

02:22 So there is no free entry and exit in a monopoly, we have the barriers of entry that prevent people from coming in and stealing market share, but here, with free entry and exit, you're gonna see that zero profit condition in the long run cuz when those profit firms will enter, when there's losses, firms will exit so you always get back to that zero profit.

02:43 Alright, so pictures. It's always nice to look at pictures.

02:47 So this is what monopolistic competition looks like.

02:50 It looks just like the monopoly graph that we've been looking at and just like every other firm, they're gonna maximize their profits where marginal revenue equals marginal cost.

03:02 In the short run, there could be some profit or losses, so here on the left, I have the graph drawn up so that the firms are making some profits, so you see where marginal cost equals marginal revenue that's our profit maximizing quantity.

03:16 To find the prize, we go up to the demand curve and we go over to the vertical axis, that's our price.

03:23 So here, we have a price that's greater than average total cost.

03:27 So the price, that's your average revenue, that's the amount that you're gonna make per unit.

03:32 Your average total cost, that's your cost per unit so our profit per unit is gonna be the price minus the average total cost.

03:39 Total profit is gonna be that profit per unit times the quantity, so it'll be the area of this rectangle right here.

03:47 Now firm making losses, again, they're gonna maximize profits or minimize losses where marginal revenue equals marginal cost, so here, that's right here, this is lost minimizing, so if you wanna find the prize, marginal revenue equals marginal cost, you drew the line up to the demand curve and you go over.

04:06 Here, you'll notice that price is less than average total cost, so your cost per unit is greater than your revenue per unit.

04:14 So average total cost minus price that is your loss per unit; your total losses are the loss per unit times the number of units, or else the area of this red rectangle right here.

04:25 So this is in the short run, you can have profits and losses in the short run, but in the long run, like perfect competition, you're gonna see those profits go to zero.

04:35 So now let's take a look at the long run. So let's start here with the green curves.

04:40 Alright, with the green curves what you're gonna notice, will go to our profit maximizing quantity where our marginal revenue equals our marginal cost and we draw our line up to our demand curve to find our price.

04:52 You'll notice here at first, that our price is greater than the average total cost, so we're making some profit.

04:59 However, there's free entry and exit so what's gonna happen, there's profit in that market so firms are gonna enter.

05:06 As firms enter, that's gonna steal some of your market share so that's gonna shift your demand curve and your marginal revenue curve to the left.

05:15 Again, you maximize your profit you minimize your losses where the marginal revenue equals the marginal cost, but now that's your quantity, too.

05:24 So you notice you draw the line up to our new demand curve, here, price equals average total cost, so now we're making zero profits.

05:33 You could start with losses then firms with exit.

05:36 It would shift your demand curve and your marginal curve to the right and you would get back to your zero profit so that then you're not making any losses, but in the long run, we have the zero profit condition like we have in perfect competition.

05:48 But like monopoly, we have the downward slopping demand curves, but unlike monopoly, firms can enter and exit, there's no barriers to entry.

05:56 So, again, differences, alright, the differences here between monopolistic competition and perfect competition.

06:04 In monopolistic competition there's excess capacity, right, there's those inefficiencies.

06:09 We don't get to the point where the value of the marginal buyer equals the cost of the marginal seller because we maximize our profit where marginal revenue equals marginal cost and our marginal revenue is lower than our average revenue or demand curve because if we wanna sell more units, we have to lower all the price on those units to sell more, okay? So we're not gonna be as efficient as we are in perfect competition.

06:36 Also, in monopolistic competition, you're gonna have the markup over your marginal cost.

06:41 In perfect competition, remember, everybody's competing for market share so it brings that price all the way down to our marginal cost with our downward slopping demand curves in monopolistic competition, that's not gonna be the case. We're gonna have some markup in price over marginal cost.

06:57 So now let's put some pictures to those words, alright, so this is what we're just talking about but with the pictures.

07:04 So the perfectly competitive firm they produce at the efficient scale, you see that right here, that's at the very bottom of the average total cost curve, okay? So the monopolistically competitive firm, they don't get to that efficient scale, that's the efficient quantity because they have the downward slopping demand curve, alright? On a perfect competition, we're gonna have price equals marginal cost, that's not the case here in monopolistically competitive firm.

07:31 You're gonna have price above marginal cost, that's our markup, that's do let downward slopping demand curve, that's like monopoly, alright? So in one sense, monopolistic competition is like a monopoly and they have those downward slopping demand curves and you all have a price above marginal cost, you'll have a markup that keeps you from getting to that efficient scale or that efficient quantity of production with no dead weight losses.

07:56 But, just like the perfect competition, in monopolistic competition, you're gonna have that zero profit condition where eventually, your price is gonna equal your average total cost because of firms entering and exiting.

08:11 Alright, so what's the ramification for a monopolistic competition on social welfare? Alright, but we know perfect competition with no externalities is gonna lead to an efficient outcome, okay? We know monopoly that leads to that dead weight loss so it's very inefficient.

08:29 When monopolistic competition is a little more complicated, right, it's a hybrid of both.

08:34 We know that we're gonna have some dead weight loss so what could happen we could have the government come in and you could regulate that price equals marginal cost.

08:45 However, that's problematic, right? Because all the products aren't identical so how do you regulate firms that don't have identical products, that makes it difficult, as well, if you're gonna do that, it's gonna mean losses for the firm that had to be made up with taxpayer funded subsidies, right? So if you're forcing their price down to the marginal cost, you're forcing them to take some losses.

09:08 Now, if you get the price down to the marginal cost, that's gonna also cause an incentive problem.

09:14 They have no incentive to lower their price anymore because then there's no profit motive, right? There's no profit motive for them by lowering their cost, so the situation is more complicated than it is with perfect competition or in monopoly, so it's harder to judge what you should do if you should take actions to try to correct those inefficiencies because the actions might be worse than the inefficiencies in the end.

09:39 Alright, so here, I put a little cheat sheet together for you at the end so you'll look at the difference between perfect competition, monopolistic competition, and monopolies.

09:49 So here the goal of the firms, they all wanna maximize their profits, of course, they do.

09:53 Althought the maximize rules the same, marginal revenue equals marginal cost for all different, for all three structures in the market, alright, and economic profits in the short run.

10:04 They can all have the profit in the short run.

10:06 Now in the long run that's a little different, okay. So perfect competition, are they a price taker? Yes, they have no power over the price, right. There's so many firms with identical products.

10:17 For our monopolistic competitions, they're not price takers because we don't have identical products, you get some of that brand loyalty.

10:26 Some people like Burger King burgers better than they like McDonald's burgers.

10:30 With the monopoly, are they a price taker? No, they're the only game in town, okay, so they don't have to worry about competition because those barriers to entry.

10:38 So our price, in perfect competition, it's gonna equal our marginal cost, right, we get to that efficient scale so we get pushed all the way down to that efficient scale which means we're producing the societal efficient amount or the societal quantity that's efficient so that we have no dead weight losses.

10:55 That's not the case in monopolistic competition and monopoly, so we're gonna have some of those deadweight losses.

11:02 So we see here is that the welfare maximizing level of output, yes, for perfect competition because we're the efficient scale, no, from monopolistic competition and monopolies.

11:12 There's many firms in perfect competition, there's many firms in monopolistic competition but there's only one firm in monopolies, alright? Now entering the long run, yes, you have it in perfect competition and monopolistic competition that's what gets you to your zero profits in the long run for the monopoly, they have nobody entering and exiting.

11:34 Lastly, economic profit in the long run, we just touch on this, no for perfect competition, no for monopolistic competition, but yes for monopoly.

11:44 So what have we learned here? We know how to define monopolistic competition.

11:47 We know the difference between monopolistic competition, perfect competition, and in monopoly.

11:53 We understand the implications of the monopolistic competition for profits in the short and long run.

11:58 They can make profits in the short run, but entry and exit, means no profits in the long run.

12:03 And we understand the implications of monopolistic competition for an economic well-being.

12:08 It's much more complicated than it is for our monopoly and our perfect competition.

12:14 So that's your presentation on monopolistic competition. Thank you.