FourTypesofIndustriesFourTypesofIndustries

ImperfectlyCompetitiveMarketsMonopolyMonopolisticCompetition

Manyfirmssellingproductsthataresimilarbutnotidentical.OligopolyOnlyafewsellers,eachofferingasimilaroridenticalproducttotheothers.ImperfectlyCompetitiveMarkeTheFourTypesofMarketStructureMonopolyOligopolyMonopolisticCompetitionPerfectCompetitionTapwaterCableTVTennisballsCrudeoilNovelsMoviesWheatMilkNumberofFirms?TypeofProducts?ManyfirmsOnefirmFewfirmsDifferentiatedproductsIdenticalproductsTheFourTypesofMarketStrucMonopolisticCompetitionMonopolisticCompetitionMonopolisticCompetitionMarketsthathavesomefeaturesofcompetitionandsomefeaturesofmonopoly.MonopolisticCompetitionMarketAttributesofMonopolisticCompetitionManysellersProductdifferentiationFreeentryandexit------AttributesofMonopolisticComManySellersTherearemanyfirmscompetingforthesamegroupofcustomers.Productexamplesincludebooks,CDs, movies,computergames,restaurants, pianolessons,cookies,furniture,etc.ManySellersTherearemanyfirProductDifferentiationEachfirmproducesaproductthatisatleastslightlydifferentfromthoseofotherfirms.Ratherthanbeingapricetaker,eachfirmfacesadownward-slopingdemandcurve.ProductDifferentiationEachfiFreeEntryorExitFirmscanenterorexitthemarketwithoutrestriction.Thenumberoffirmsinthemarketadjustsuntileconomicprofitsarezero.FreeEntryorExitFirmscanenMonopolisticCompetitorsintheShortRun...(a)FirmMakesaProfitQuantity0PriceDemandMRATCProfitMCProfit-maximizingquantityPriceAveragetotalcostMonopolisticCompetitorsinthMonopolisticCompetitorsintheShortRun...Quantity0PriceDemandMRLosses(b)FirmMakesLossesMCATCAveragetotalcostLoss-minimizingquantityPriceMonopolisticCompetitorsinthMonopolisticCompetitionintheShortRunShort-runeconomicprofitsencouragenewfirmstoenterthemarket.This:Increasesthenumberofproductsoffered.Reducesdemandfacedbyfirmsalreadyinthemarket.Incumbent（傳統運營商）firms’demandcurvesshifttotheleft.Demandfortheincumbentfirms’productsfall,andtheirprofitsdecline.MonopolisticCompetitioninthMonopolisticCompetitionintheShortRunShort-runeconomiclossesencouragefirmstoexitthemarket.This:

Decreasesthenumberofproductsoffered.Increasesdemandfacedbytheremainingfirms.Shiftstheremainingfirms’demandcurvestotheright.Increasestheremainingfirms’profits.MonopolisticCompetitioninthTheLong-RunEquilibriumFirmswillenterandexituntilthefirmsaremakingexactlyzeroeconomicprofits.TheLong-RunEquilibriumFirmsAMonopolisticCompetitor

intheLongRun...zeroeconomic

profitsQuantityPrice0DemandMRATCMCProfit-maximizingquantityP=ATCAMonopolisticCompetitor

inTwoCharacteristicsofLong-RunEquilibriumAsinamonopoly,priceexceedsmarginalcost.Profitmaximizationrequiresmarginalrevenuetoequalmarginalcost.Thedownward-slopingdemandcurvemakesmarginalrevenuelessthanprice.TwoCharacteristicsofLong-RuTwoCharacteristicsofLong-RunEquilibriumAsinacompetitivemarket,priceequalsaveragetotalcost.Freeentryandexitdriveeconomicprofit tozero.TwoCharacteristicsofLong-RuMonopolisticversusPerfectCompetitionTherearetwonoteworthydifferencesbetweenmonopolisticandperfectcompetition—excesscapacity

（超額的產能）and

markup（加價）.MonopolisticversusPerfectCoExcessCapacityThereisexcesscapacityinmonopolisticcompetitioninthelongrun.Inmonopolisticcompetition,outputislessthantheefficientscaleofperfectcompetition.ExcessCapacityThereisexcessExcessCapacity...Quantity(a)MonopolisticallyCompetitiveFirm(b)PerfectlyCompetitiveFirmQuantityPriceP=MR(demandcurve)MCATCPriceDemandMCATCExcesscapacityQuantityproducedEfficientscaleP=MCQuantityproduced=EfficientscalePExcessCapacity...Quantity(a)ExcessCapacityThereisnoexcesscapacityinperfectcompetitioninthelongrun.Freeentryresultsincompetitivefirmsproducingatthepointwhereaveragetotalcostisminimized,whichistheefficientscale

ofthefirm.ExcessCapacityThereisnoexcMarkupOverMarginalCostForacompetitivefirm,priceequalsmarginalcost.Foramonopolisticallycompetitivefirm,priceexceedsmarginalcost.MarkupOverMarginalCostForaMarkupOverMarginalCostBecausepriceexceedsmarginalcost,anextraunitsoldatthepostedpricemeansmoreprofitforthemonopolisticallycompetitivefirm.MarkupOverMarginalCostBecauMarkupOverMarginalCost...Quantity(a)MonopolisticallyCompetitiveFirm(b)PerfectlyCompetitiveFirmQuantityPriceP=MCP=MR(demandcurve)MCATCQuantityproducedPricePDemandMarginalcostMCATCMRMarkupQuantityproducedMarkupOverMarginalCost...QuMonopolisticversusPerfectCompetition...Quantity(a)MonopolisticallyCompetitiveFirm(b)PerfectlyCompetitiveFirmQuantityPriceP=MR(demandcurve)MCATCQuantityproducedEfficientscalePricePDemandMCATCP=MCExcesscapacityMarginalcostMarkupMRQuantityproduced=EfficientscaleMonopolisticversusPerfectCoMonopolisticCompetitionandtheWelfareofSocietyMonopolisticcompetitiondoesnothaveallthedesirablepropertiesofperfectcompetition.MonopolisticCompetitionandtMonopolisticCompetitionandtheWelfareofSocietyThereisthenormaldeadweightlossofmonopolypricinginmonopolisticcompetitioncausedbythemarkupofpriceovermarginalcost.However,theadministrativeburdenofregulatingthepricingofallfirmsthatproducedifferentiatedproductswouldbeoverwhelming.MonopolisticCompetitionandtMonopolisticCompetitionandtheWelfareofSocietyAnotherwayinwhichmonopolisticcompetitionmaybesociallyinefficientisthatthenumberoffirmsinthemarketmaynotbethe“ideal”one.MonopolisticCompetitionandtProductDifferentiationProductdifferentiation:theeffortbyfirmstoproducegoodsthatareslightlydifferentfromothertypesofgoods.Homogeneousproducts:goodsthathavenoproductdifferentiation;goodsthatareexactlythesame.ProductDifferentiationProductAdvertisingWhenfirmsselldifferentiatedproductsandchargepricesabovemarginalcost,eachfirmhasanincentivetoadvertiseinordertoattractmorebuyerstoitsparticularproduct.AdvertisingWhenfirmsselldifAdvertisingFirmsthatsellhighlydifferentiatedconsumergoodstypicallyspendbetween10and20percentofrevenueonadvertising.Overall,about2percentoftotalrevenue,orover$100billionayear,isspentonadvertising.AdvertisingFirmsthatsellhigAdvertisingCriticsofadvertisingarguethatfirmsadvertiseinordertomanipulatepeople’stastes.Theyalsoarguethatitimpedes(阻礙)competitionbyimplyingthatproductsaremoredifferentthantheytrulyare.AdvertisingCriticsofadvertisAdvertisingDefendersarguethatadvertisingprovidesinformationtoconsumersTheyalsoarguethatadvertisingincreasescompetitionbyofferingagreatervarietyofproductsandprices.Thewillingnessofafirmtospendadvertisingdollarscanbeasignaltoconsumersaboutthequalityoftheproductbeingoffered.AdvertisingDefendersarguethaBrandNamesCriticsarguethatbrandnamescauseconsumerstoperceivedifferencesthatdonotreallyexist.BrandNamesCriticsarguethatHowareProductsDifferentiated?Waystodifferentiateproducts:PhysicalcharacteristicsAlteringtheproductsphysicalcharacteristics,suchasmakingthelegroominacarlongerormakingaknifesharper.LocationAMcDonald’srestaurant10milesawayhasthesamemenuandthesameproductastheonedownthestreet.However,itismorelikelyforyoutobuyfromthenearerrestaurant.HowareProductsDifferentiate3)TimeaflightfromLosAngelestoNewYorkthatleavesat10a.m.isadifferentproductasonethatleavesat6p.m;a24hoursupermarketoffersadifferentservicefromanotherthatisn’t.Convenience:yogurtinatube,singleservingmicrowaveablesoups,etc.,offersmoreconveniencetotheeverbusyindividual.HowareProductsDifferentiated?3)TimeHowareProductsDiffeBrandNamesEvidinginformationaboutquality.givingfirmsincentivetomaintainhighquality.BrandNamesEconomistshaveargSummaryAmonopolisticallycompetitivemarketischaracterizedbythreeattributes:manyfirms,differentiatedproducts,andfreeentry.Theequilibriuminamonopolisticallycompetitivemarketdiffersfromperfectcompetitioninthateachfirmhasexcesscapacityandeachfirmchargesapriceabovemarginalcost.SummaryAmonopolisticallycompSummaryMonopolisticcompetitiondoesnothaveallofthedesirablepropertiesofperfectcompetition.Thereisastandarddeadweightlossofmonopolycausedbythemarkupofpriceovermarginalcost.Thenumberoffirmscanbetoolargeortoosmall.SummaryMonopolisticcompetitioSummaryTheproductdifferentiationinherentinmonopolisticcompetitionleadstotheuseofadvertisingandbrandnames.Criticsofadvertisingandbrandnamesarguethatfirmsusethemtotakeadvantageofconsumerirrationalityandtoreducecompetition.SummaryTheproductdifferentiaSummaryDefendersarguethatfirmsuseadvertisingandbrandnamestoinformconsumersandtocompetemorevigorouslyonpriceandproductquality.SummaryDefendersarguethatfiFourTypesofIndustriesFourTypesofIndustries

ImperfectlyCompetitiveMarketsMonopolyMonopolisticCompetition

Manyfirmssellingproductsthataresimilarbutnotidentical.OligopolyOnlyafewsellers,eachofferingasimilaroridenticalproducttotheothers.ImperfectlyCompetitiveMarkeTheFourTypesofMarketStructureMonopolyOligopolyMonopolisticCompetitionPerfectCompetitionTapwaterCableTVTennisballsCrudeoilNovelsMoviesWheatMilkNumberofFirms?TypeofProducts?ManyfirmsOnefirmFewfirmsDifferentiatedproductsIdenticalproductsTheFourTypesofMarketStrucMonopolisticCompetitionMonopolisticCompetitionMonopolisticCompetitionMarketsthathavesomefeaturesofcompetitionandsomefeaturesofmonopoly.MonopolisticCompetitionMarketAttributesofMonopolisticCompetitionManysellersProductdifferentiationFreeentryandexit------AttributesofMonopolisticComManySellersTherearemanyfirmscompetingforthesamegroupofcustomers.Productexamplesincludebooks,CDs, movies,computergames,restaurants, pianolessons,cookies,furniture,etc.ManySellersTherearemanyfirProductDifferentiationEachfirmproducesaproductthatisatleastslightlydifferentfromthoseofotherfirms.Ratherthanbeingapricetaker,eachfirmfacesadownward-slopingdemandcurve.ProductDifferentiationEachfiFreeEntryorExitFirmscanenterorexitthemarketwithoutrestriction.Thenumberoffirmsinthemarketadjustsuntileconomicprofitsarezero.FreeEntryorExitFirmscanenMonopolisticCompetitorsintheShortRun...(a)FirmMakesaProfitQuantity0PriceDemandMRATCProfitMCProfit-maximizingquantityPriceAveragetotalcostMonopolisticCompetitorsinthMonopolisticCompetitorsintheShortRun...Quantity0PriceDemandMRLosses(b)FirmMakesLossesMCATCAveragetotalcostLoss-minimizingquantityPriceMonopolisticCompetitorsinthMonopolisticCompetitionintheShortRunShort-runeconomicprofitsencouragenewfirmstoenterthemarket.This:Increasesthenumberofproductsoffered.Reducesdemandfacedbyfirmsalreadyinthemarket.Incumbent（傳統運營商）firms’demandcurvesshifttotheleft.Demandfortheincumbentfirms’productsfall,andtheirprofitsdecline.MonopolisticCompetitioninthMonopolisticCompetitionintheShortRunShort-runeconomiclossesencouragefirmstoexitthemarket.This:

Decreasesthenumberofproductsoffered.Increasesdemandfacedbytheremainingfirms.Shiftstheremainingfirms’demandcurvestotheright.Increasestheremainingfirms’profits.MonopolisticCompetitioninthTheLong-RunEquilibriumFirmswillenterandexituntilthefirmsaremakingexactlyzeroeconomicprofits.TheLong-RunEquilibriumFirmsAMonopolisticCompetitor

intheLongRun...zeroeconomic

profitsQuantityPrice0DemandMRATCMCProfit-maximizingquantityP=ATCAMonopolisticCompetitor

inTwoCharacteristicsofLong-RunEquilibriumAsinamonopoly,priceexceedsmarginalcost.Profitmaximizationrequiresmarginalrevenuetoequalmarginalcost.Thedownward-slopingdemandcurvemakesmarginalrevenuelessthanprice.TwoCharacteristicsofLong-RuTwoCharacteristicsofLong-RunEquilibriumAsinacompetitivemarket,priceequalsaveragetotalcost.Freeentryandexitdriveeconomicprofit tozero.TwoCharacteristicsofLong-RuMonopolisticversusPerfectCompetitionTherearetwonoteworthydifferencesbetweenmonopolisticandperfectcompetition—excesscapacity

（超額的產能）and

markup（加價）.MonopolisticversusPerfectCoExcessCapacityThereisexcesscapacityinmonopolisticcompetitioninthelongrun.Inmonopolisticcompetition,outputislessthantheefficientscaleofperfectcompetition.ExcessCapacityThereisexcessExcessCapacity...Quantity(a)MonopolisticallyCompetitiveFirm(b)PerfectlyCompetitiveFirmQuantityPriceP=MR(demandcurve)MCATCPriceDemandMCATCExcesscapacityQuantityproducedEfficientscaleP=MCQuantityproduced=EfficientscalePExcessCapacity...Quantity(a)ExcessCapacityThereisnoexcesscapacityinperfectcompetitioninthelongrun.Freeentryresultsincompetitivefirmsproducingatthepointwhereaveragetotalcostisminimized,whichistheefficientscale

ofthefirm.ExcessCapacityThereisnoexcMarkupOverMarginalCostForacompetitivefirm,priceequalsmarginalcost.Foramonopolisticallycompetitivefirm,priceexceedsmarginalcost.MarkupOverMarginalCostForaMarkupOverMarginalCostBecausepriceexceedsmarginalcost,anextraunitsoldatthepostedpricemeansmoreprofitforthemonopolisticallycompetitivefirm.MarkupOverMarginalCostBecauMarkupOverMarginalCost...Quantity(a)MonopolisticallyCompetitiveFirm(b)PerfectlyCompetitiveFirmQuantityPriceP=MCP=MR(demandcurve)MCATCQuantityproducedPricePDemandMarginalcostMCATCMRMarkupQuantityproducedMarkupOverMarginalCost...QuMonopolisticversusPerfectCompetition...Quantity(a)MonopolisticallyCompetitiveFirm(b)PerfectlyCompetitiveFirmQuantityPriceP=MR(demandcurve)MCATCQuantityproducedEfficientscalePricePDemandMCATCP=MCExcesscapacityMarginalcostMarkupMRQuantityproduced=EfficientscaleMonopolisticversusPerfectCoMonopolisticCompetitionandtheWelfareofSocietyMonopolisticcompetitiondoesnothaveallthedesirablepropertiesofperfectcompetition.MonopolisticCompetitionandtMonopolisticCompetitionandtheWelfareofSocietyThereisthenormaldeadweightlossofmonopolypricinginmonopolisticcompetitioncausedbythemarkupofpriceovermarginalcost.However,theadministrativeburdenofregulatingthepricingofallfirmsthatproducedifferentiatedproductswouldbeoverwhelming.MonopolisticCompetitionandtMonopolisticCompetitionandtheWelfareofSocietyAnotherwayinwhichmonopolisticcompetitionmaybesociallyinefficientisthatthenumberoffirmsinthemarketmaynotbethe“ideal”one.MonopolisticCompetitionandtProductDifferentiationProductdifferentiation:theeffortbyfirmstoproducegoodsthatareslightlydifferentfromothertypesofgoods.Homogeneousproducts:goodsthathavenoproductdifferentiation;goodsthatareexactlythesame.ProductDifferentiationProductAdvertisingWhenfirmsselldifferentiatedproductsandchargepricesabovemarginalcost,eachfirmhasanincentivetoadvertiseinordertoattractmorebuyerstoitsparticularproduct.AdvertisingWhenfirmsselldifAdvertisingFirmsthatsellhighlydifferentiatedconsumergoodstypicallyspendbetween10and20percentofrevenueonadvertising.Overall,about2percentoftotalrevenue,orover$100billionayear,isspentonadvertising.AdvertisingFirmsthatsellhigAdvertisingCriticsofadvertisingarguethatfirmsadvertiseinordertomanipulatepeople’stastes.Theyalsoarguethatitimpedes(阻礙)competitionbyimplyingthatproductsaremoredifferentthantheytrulyare.AdvertisingCriticsofadvertisAdvertisingDefendersarguethatadvertisingprovidesinformationtoconsumersTheyalsoarguethatadvertisingincreasescompetitionbyofferingagreatervarietyofproductsandprices.Thewillingnessofafirmtospendadvertisingdollarscanbeasignaltoconsumersaboutthequalityoftheproductbeingoffered.AdvertisingDefendersarguethaBrandNamesCriticsarguethatbrandnamescauseconsumerstoperceivedifferencesthatdonotreallyexist.BrandNamesCriticsarguethatHowareProductsDifferentiated?Waystodifferentiateproducts:PhysicalcharacteristicsAlteringtheproductsphysicalcharacteristics,suchasmakingthelegroominacarlongerormakingaknifesharper.Location