25 Monopolistic Competition

• The quality of a wak, the output and pricing band's original songs, the style of the band's decisions of monopolistically competitive firms, and the musical perfectly competitive firms are what you monopolistically competitive industry care about as a consumer.
• If you want to find out the answer to this question, you need to learn about the market structure in the prices of information products and evaluate how you can learn about monopolistic competition.

• On the day the book appeared on the shelves, the price of the book had fallen to about $16 from the cover jacket's price of almost $29.

• You can compensate for the book's production and distribution costs.

• In the 1920s and 1930s, economists became more aware of the fact that there were many industries to which both the perfectly competitive model and the pure monopoly model did not apply.
• Some sort of middle ground was developed through theoretical and empirical research.

• The theory presented by Chamberlin is the entry into the industry.

• Chamberlin defined monopolistic competition as a market structure in which a large number of producers offer similar but differentiated products.

• Monolithic competition is an important form of market structure in the United States.
• That is true of all developed economies.

• There are many firms in a perfectly competitive industry.
• There is only one in pure monopoly.
• There are a lot of firms in monopolistic competition, but not as many as in perfect competition.
• There are several important implications of this fact.

• Each firm has a small share of the total market.

• It is difficult for all of them to work together to set a pure monopoly price.

• It is nearly impossible to have monopolistic pricing in an industry.

• The flow of new firms into the industry makes collusive agreements less likely.
• The monitoring and detection of cheating is very difficult because of the large number of firms.
• High rates of innovation and differentiated products make this difficult.

• Heterogeneous agreements are more difficult for a homogeneous product.

• No firm tries to take into account the reaction of its competitors.

• It is not possible for an individual producer to take into account the possible reactions of rivals to its own output and price changes.

• The distinguishing of products by brand name has an absolute monopoly over its own product, which is slightly different from color and other minor attributes.
• This means that the firm has some control over the price.
• It faces downward-sloping demand competitive markets in which products are in curve.

• There are a lot of brand names for consumer goods and services.
• We don't have to buy just one type of video game, one type of jeans, or one type of footwear.
• We can usually find similar but differentiated products.

• Not according to some people in Punxsutawny, Pennsylvania.

• According to U.S. folklore, if a groundhog emerges from its den on Febru Every Groundhog Day, the various groundhog lodges promote the allegedly ary 2--the official Groundhog Day--and sees its shadow, there will be six differentiated weather-forecasting talents of their groundhogs

• Phil has been used to predict the weather for over a century.

• Differentiated products have many similar replacements.
• The price elasticity of demand for the individual firm has an impact on this.
• The price elasticity of demand is determined by the availability of substitute and how close they are to each other.
• A small increase in the price of the product under study will cause many consumers to switch to another product that is close in quality.
• The demand curve is elastic compared to a monopolist's demand curve.
• Substitutes are perfect because we are only dealing with one undifferentiated product.
• The individual firm has an elastic demand curve.

• No individual firm in a perfectly competitive market will advertise.
• A firm that is perfectly competitive can sell all of its goods at the going market price.
• The product that the perfect competitor is selling is the same product that all other firms in the industry are selling.
• All the competitors will be helped by any advertisement that encourages consumers to buy more of that product.
• If all firms in an industry agree to advertise to urge the public to buy more beef or drink more milk, then a perfect competitor cannot be expected to incur any advertising costs.

• The firm can search for the most profitable price that consumers are willing to pay for its differentiated product because consumers regard the monopolistic competitor's product as distinguishable from the other firms' products.
• Increased profits may be a result of advertising.
• To increase demand and differentiate one's product, advertising is used.
• It should be carried to the point at which the additional revenue from one more dollar of advertising is equal to the additional cost.

• Potential competition is always present for any current monopolistic competitor.
• The less costly entry is the more worried a competitor is about losing business.

• The computer software industry is an example of a monopolistic competitive industry.
• Different programs are provided by many small firms.
• The capital costs required to enter the industry are small.
• You only need skilled programmers.
• There are no legal restrictions.
• More than 150 computer publications have extensive advertising in them.

• The answers can be found on page 572.

• In a monopolistically competitive industry there is entry and exit of new firms.

• Sales promotion and advertising are common features of monopolistically competitive firms.

• We can analyze the price and output behavior of each firm in a monopolistically competitive industry now that we are aware of the assumptions underlying the monopolistic competition model.
• We assume that the desired product type and quality have been chosen.
• The budget and the type of promotional activity have already been chosen and do not change.

• It faces a marginal revenue curve that is downward sloping and below the demand curve.

• The marginal cost curve intersects the marginal revenue curve from below to find the profit-maximizing rate of output and the profit-maximizing price.
• The profit-maximizing output rate is given by that.
• We draw a line up to the curve.

• The typical monopolistic competitor is shown making economic Panel profits.

• Firms would leave the industry.

• Each firm's demand curve would shift to the right.

• It is possible for a monopolistic competitor to make economic profits over and above the normal rate of return in order to keep that firm in that industry.
• The blueshaded rectangle shows economic profits.

• Losses in the short run are possible.
• There is a panel of Figure 25-1.
• The red-shaded rectangle shows the losses.

• In the short run, it is possible to observe either economic profits or economic losses.
• The price is above the marginal cost.

• There is a similarity between monopolistic competition and perfect competition in the long run.
• Competition will cause economic profits to disappear in the long run because so many firms make substitute products for the product in question.
• They will be reduced to zero either through entry by new firms seeing a chance to make a higher rate of return than elsewhere or by changes in product quality.
• Economic losses will disappear in the long run because firms that suffer them will leave the industry.
• They will go into another business that has a normal expected rate of return.

• This is an idealized, long-run equilibrium situation for each firm in the industry.
• We live in a fast paced world.

• The answer is that the demand curve for the perfect competitor is elastic.
• The demand curve of the individual monopolistic competitor is not as elastic as it could be.
• The firm has control over price.
• The price elasticity of demand is not infinite.

• Both panels show average total costs just touching the demand curves of the price the firm is selling the product for.
• The perfect competitor's total costs are at a minimum.
• This isn't the case with the competitor.

• The perfectly competitive firm has zero economic profits in the long run.
• The price is higher than the long run.
• The firm is monopolistic and competitive.
• The firm's average total cost curve is the same as the firm's demand curve.
• It operates at a rate cost curve.

• The equilibrium rate of output is to the left of the minimum point on the average total cost curve.
• A competitor charges a price that exceeds marginal cost in order to obtain economic profits.
• New ingredients are similar to the monopolist.

• There are too many firms with excess capacity.

• Critics of monopolistic competition say that society's resources are being wasted.

• Chamberlin had an answer to the criticism.
• Chamberlin didn't consider the difference in cost between monopolistic and perfect competition to be a waste.
• He argued that it's rational for consumers to like different things.
• Consumers are willing to accept increased production costs in order to get more choice and variety of output.

• The answers can be found on page 572.

• It is possible for a minimum point on the average cost curve.

• Chamberlin argued that the difference between the rate of return and economic profits is called the __________ run.

• Competitive firms regard their brand names as valuable because they have value to consumers.
• Firms use trademarks to distinguish their product brands from those of other firms.

• The trademarks are associated with the firms' products.
• Companies value their brands as private intellectual property, and they engage in advertising to maintain their brand identity.

• As long as the firm is viable, the prospect of future profits is generated by ongoing sales.
• A company's value in the marketplace depends on its current profitability and perception of its future profitability.

• The market values of the world's most valuable product brands are shown in Table 25-1 at the top of the page.
• The number of shares traded and the market price are used to calculate each valuation.
• Brand names, symbols, logos, and unique color schemes such as the color combinations trademarked by FedEx relate to consumers' perceptions of product differentiation and hence to the market values of firms.
• Companies register their trademarks with the U.S. Patent and Trademark Office.
• If someone makes unauthorized use of its brand name, spreads false rumors about the company, or engages in other devious activities that can reduce the value of its brand, the company has the right to seek legal damages.

• monopolistically competitive firms often engage in advertising to help ensure that consumers differentiate their product brands from those of other firms.
• The nature of advertising is dependent on the types of products that firms wish to distinguish from competing brands.

• Firms rely on two approaches to advertising their products as they did in the past.

• Advertising intended to reach as many consumers as possible through media such as television, newspapers, radio, and magazines.

• A consumer can respond directly to an advertising message.

• A consumer can follow up directly by searching for more information.
• Some types of internet advertising include banner ads and direct product orders.

• The qualities and characteristics of a product are what determines how the firm advertises that product.

• A product with characteristics that allow a consumer to sample it before making a purchase.

• Consumers don't have the expertise to assess a product without assistance.

• Depending on whether the item being marketed is a search good or an experience good, the forms of advertising that firms use vary a lot.

• Potential buyers look at the quality of the movie.

• Advertising that is intended to induce is likely to depict happy people drinking the clearly identified product during breaks to purchase a particular product from enjoyable outdoor activities on a hot day.

• Producers often use a mix of both informational and persuasive advertising if the product is a good one.
• Detailed information about the product's curative properties and side effects can be found in an ad for a pharmaceutical product.

• High profits in an industry are a sign that resources should go to that industry.
• Individual companies can engage in signaling behavior.
• Establishing brand names or trademarks can be done by a firm.
• Prospective consumers will be reassured that this is a company that will stay in business.
• U.S. banks used to need a way to signal their soundness.
• They used marble and granite to build large bank buildings.
• Stone structures are permanent.
• The effect was to convince bank customers that they weren't doing business with fly-by-night operations.

• Ford Motor Company incurs costs when it advertises heavily.
• Selling many Ford vehicles over a long period of time is the only way it can recover those costs.
• Heavy advertising in the company's brand name indicates to car buyers that Ford intends to stay in business a long time and wants to develop a loyal customer base.

• The company signals to consumers that it is a product to find out if they have a previously unknown intention to remain in business indefinitely.
• Because the purpose of persuasive advertising spending is to attract consumers' attention and less to provide the company with product information, many people think that persuasive will perpetuate its operations for years to come.
• In this advertising, there is no clear benefit to society at large and even persuasive advertising does not argue for government limits on such ads.
• When a company such as Coca-Cola launches a new ad society, banning such ads would impose a cost.

• The answers can be found on page 572.

• Advertising to firms' products from those of other firms is more likely if words, symbols, and logos are used.
• This is an item that people need to market.

• An item that is produced using information costs associated with the use of knowledge and other information-intensive inputs as intensive inputs at a relatively high fixed cost key factors of production.
• After the first unit has been produced, it is possible to sell additional units at a relatively low per-unit cost.

• Good examples are computer games, computer operating systems, digital music and videos, educational and training software, electronic books and encyclopedias, and office productivity software.

• The first copy of an information product can cost a lot.
• Making additional copies can be very inexpensive once the first copy is created.
• A firm that sells a computer game can make properly formatted copies of the game's original digital file for consumers to download, at a price, via the Internet.

• Consider the production and sale of a computer game if you want to think about the cost conditions faced by the seller.
• The company that creates a computer game has a lot of work to do.
• Each hour of labor and each unit of other resources costs an opportunity cost.

• The marginal cost of making and distributing additional copies of the game is very low once the game is readable by personal computers.
• The cost to place the required files on a DVD or on the company's website for a computer game is minuscule.

• A manufacturer decides to make and sell a computer game.
• A total fixed cost of $250,000 is needed to create the first copy of the game.
• The marginal cost that the company incurs to place the computer game on a DVD or in downloadable format is the same as the price of a computer game.

• The firm's cost curves can be seen in Figure 25-4 on the facing page.
• The average fixed cost is the sum of the quantity produced and sold.
• The average cost of the first computer game is $250,000.

• The average fixed cost is $50 per game if the company sells 5,000 copies.

• The average fixed cost is $5 per game if 50,000 are sold.
• The curve of the average fixed cost is downward over the entire range of computer games.

• The total variable cost is divided by the number of units of the product that the firm sells.

• The cost of making a computer game is $250,000.

• The average fixed cost decreases if quantity increases to 50,000.
• The producer's average fixed cost curve slopes downward.

• The per-unit cost of $2.50 is the average variable cost of producing one unit.
• The average variable cost of producing two games is $5.00 and the total variable cost is $5.

• This computer game company has an average total cost curve that slopes downward over its entire range.

• Short-run economies of operation have a distinguishing characteristic of information information product arising from declining products that sets them apart from most other goods and services.

• There are many computer games that consumers can choose from.

• There are many products that are close replacements for computer games.
• There are no two computer games the same.
• This means that the particular computer game product sold by the company is different from other products.

• Let's suppose that this company participates in a monopolistically competitive market for this computer game.

• Consumers will buy 10,000 copies of the game if the price is $27.50 per game and the marginal cost is $2.50 per copy.
• $50,000 in revenues is what this yields.
• The firm's total cost number of copies is 27.
• The total cost of selling 20,000 games is $275,000 and the total cost of selling 20,000 copies is $300,000.
• The total fixed cost of producing the computer game is $250,000, which is the difference between the Marginal cost pricing and the average variable cost.

• Zero economic profits are earned by the firm.

• The answer to this question is provided by the Quantity per Time Period.
• The marginal cost of the computer game will be set by the company and it will charge only $2.50 per game.
• The company could sell 20,000 copies of this game if more people wanted to purchase it at this price.

• There would be a problem for the company.
• It would make $50,000 in revenues if it sold 20,000 copies of the game.
• The average cost of 20,000 copies is $250,000/20,000, or $12.50 per game.

• The total cost of selling 20,000 copies of a game is implied by adding this to the average variable cost.
• The company would earn an average loss of $12.50 per computer game for 20,000 copies sold under marginal cost pricing.
• The company's total economic loss from selling 20,000 computer games was $250,000.
• The company would not be able to recover the $250,000 cost of the game.

• The nature of information products and the failure of marginal cost pricing to allow firms to cover the fixed costs of producing those products is related to the failure of marginal cost pricing.
• Marginal cost pricing is not feasible in the marketplace because of short-run economies of operation.

• Perfect competition is associated with marginal cost pricing.
• An implication of this example is that markets for information products can't be perfectly competitive.
• Competition is the rule in the market for information products.

• The producer's average cost of production, including all implicit opportunity costs, will be equal to the price of the computer game after all entry or exit from the market has occurred.
• The game's price is consistent with earning a normal return on invested capital because the game's total revenues are sufficient to cover all explicit and implicit costs.

• The company's total cost of offering 10,000 copies is equal to the price of a computer game.
• The average cost of producing the game is the price of each copy.

• The company's revenues from selling 10,000 copies equal $275,000.
• The company's total fixed cost is $250,000 and the $25,000 variable cost it incurs in producing 10,000 copies is an average variable cost of $2.50 per game.
• The company doesn't make any economic profits.

• When competition drives the price of an information product to equality with average total cost, sellers charge the minimum price required to cover their production costs, including the relatively high initial costs they must incur to develop their products in the first place.
• Consumers pay the lowest price possible to get sellers to provide the item.

• There is no incentive for additional companies to enter or leave the computer game industry if this and other companies face a situation like the diagram depicts.
• As a monopolistically competitive industry composed of sellers of information products moves toward long-run equilibrium, the product price naturally adjusts to equality with average total cost.

• The answers can be found on page 572.

• They can sell additional units if they fail to cover the high fixed costs of the first unit.

• In a long-run equilibrium outcome, the price of an information product equals the price of another product.

• If a firm sets the price of an information product equal to what it costs to produce it, it will only make enough money to cover its cost of capital.

• The president of Vroom Foods likes to say that his Jolt Gum and Mints and Snickers Charged candy bars are Stimulating Candy Sales.

• One piece of either product contains 100 milligrams of Foosh Energy Mints.

• Vroom's customers want that extra 1.

• N Product Differentiation the quality of their music is the most important issue for a group of musicians bringing together their voices, guitars, and drums in a commercial venture.
• Although a rock band's musical quality is one of the more important issues, finding a name may be equally important.
• This is a difficult problem for bands to solve.

• There are many thousands of rock bands, and it is easy for a band to be challenged.

• Chicago is one of the most successful rock bands of all time and they try to differentiate themselves by writing novel songs, developing their own styles, and going by the name Chicago Transit Authority.
• When the city is competitive, the industry shortened its name.

• A band's name is a key product characteristic.
• During the 1990s, a Scottish group called Captain signed a recording deal with America and Atlantic Herman Dune, but they were blocked from doing so by Marvel Comics.

• One of the first agenda items for a band recently was to find a unique name and obtain a trademark for it, but a group tried to call itself Jane Deere, but it was confronted by a potential trademark for it.

• Why do you think that some rock bands have already trademarked their names?
• The up-and-coming band has to look for a new product that is similar but not untrademarked in order to keep its fan base.

• There are over one million trademarked names of musical artists, and 6,000 additional names are granted trademark every month.

• Most words to help develop names for rock bands can be found on the internet.

• The issues that rock bands confront in finding mix words together in different combinations can be found at www.econtoday.com/ch25.

• A monopolistically competitive rock band is in an initial long-run equilibrium.
• The band's members are considering changing the band's name to attract new fans.

• Section N: News is likely to be dismembered by these economic profits.

• You should know what to know after reading this chapter.

• Chapter 25 sells differentiated products that are close sub.
• Firms can easily leave the industry.

• Economics Video: "Gray their products from those of their rivals."
• They have an incentive to advertise.

• The Economics Video: Doc petitive firm produces to the point at which mar Martens ginal revenue equals marginal cost in the short run.
• In the short run, the price it charges can be more than the average cost.
• New firms enter the industry when economic profits increase.
• In the long run, monopolistically competitive firms earn zero economic profits.

• Advertising is done by cream petitive firms.

• The seller is more likely to use advertising to transmit information about informational advertising if the seller believes good.

• The firm often uses a mix of both informational and persuasive advertising if the product is a good one.

• Providing an infor short-run economies of * Animated Figures 25-4, 25-5 mation product entails high fixed costs but a rela operation.

• Log in to MyEconLab, take a chapter test, and get a personalized study plan that tells you which concepts you understand and which ones you need to review.
• MyEconLab will give you further practice, as well as videos, animations, and guided solutions.

• Others cook.

• The prices and total costs of a local used-book store are stronger in the sciences.

• The diagram at the right shows similar stores, but it takes advantage of its location demand and cost conditions faced by a monopolist and the word-of-mouth reputation of the coffee firm.

• A cosmetics firm pays for full-page display ads in women's magazines.

• The market price and economic profits of this bling site are what the ads direct an individual to.

• It is a typical Christmas electronics shopping paper throughout the region where potential season and makers of flat-panel TVs are located.

• The following should be categorized as an experience and Wal-Mart.
• Each manufacturer has different versions of flat-panel TVs that justify your answer.

• It is clear that most of good, a search good, or a credence good or service, the companies will end up earning only a normal and justify your answer.

Is each of the items more likely to have side effects?

• An office copying machine has low interest rates.

• Discuss the special characteristics of an informa each time a consumer downloads a copy, but the tion product, and explain the implications for a company must spend $100,000 per year develop producer's short-run average and marginal cost ing new editions of the e-books.
• The company has curves.
• Explain why having a price determined that it would earn zero economic prof equal to marginal cost is not feasible for the producer of an information product.

• A firm that sells e-books could sell 100,000 copies.

What is the profit-maximiz relating to do-it-yourself topics at the same price?

• Compare the services these firms offer on Nolo.com.

• The market for online legal services is monopolistically competitive.