Many competing businesses can be found next to one another on a busy street.
In most places a consumer in search of a quick meal has many choices, and more fast- food restaurants appear all the time.
There is a temptation to see advertising as driving up the price of a product without any benefit to the consumer.
This misconception does not account for why firms advertise.
Firms are able to inform their customers about new products and services if they advertise.
Consumers gain information to help make purchasing decisions.
Consumers also benefit from added variety, and we all get a product that's pretty close to our vision of a perfect good-- and no other market structure delivers that outcome.
The benefits and disadvantages of advertising are explored.
There are many options.
Some consumers prefer the fries at McDonald's, while others prefer the salad at a different restaurant.
Each fast food establishment has its own menu items.
The different products in fast food restaurants give each seller a small degree of market power.
Firms use product differentiation to differentiate their products.
Firms use a process to make a product significant.
Some soup companies are more attractive to potential customers because they specialize in organic soups, which are more important to important customers.
In terms of the number of sellers, the types of products sold, and the ability of competing firms to enter and exit the market, monopolistic competition falls between competitive markets and monopoly.
Firms in competitive markets don't have market power.
Buyers can expect to find low prices and wide availability.
The availability of a good or service has been restricted by monopolies.
Firms sell differentiated products in monopolistically competitive markets.
The competitor has some market power, but not as much as a monopolist.
Competitive firms have a small amount of market power that allows them to find the most profitable price.
We begin to understand how monopolistic competition works with a closer look at product differentiation.
Competitive firms create market power by differentiating their products.
Style, location, and quality are just some of the ways in which differentiation can occur.
A trip to a mall is a great way to see the differences between products.
There are many clothing stores that offer a variety of styles and types of clothing.
Some stores have styles that appeal to younger customers.
Business clothing, plus sizes, and sportswear are some of the types of clothing that can be found in clothing stores.
The store hopes to attract a certain type of customer.
Many different places to eat can be found in the food court at the mall.
The price you are willing to pay is what determines where you eat.
Like most consumers, you will choose the place that gives you what you want while giving you the best value.
Consumers' differing tastes make it possible for a wide range of food vendors to compete against each other.
Businesses that are convenient to customers attract customers.
Customers prefer convenience over price when choosing products and services at gasoline stations, dry cleaners, barber shops, and car washes.
When consumers prefer to save time and avoid the hassle of shopping for a better deal, a firm with a more convenient location will have some pricing power.
Producers who sell similar products can generate market power by locating their businesses in areas where customers travel frequently.
Firms compete on the basis of quality.
The food at Chipotle is more expensive because it is freshly prepared.
Consumers enjoy this form of product differentiation.
Budget conscious consumers can eat at taco bell, while those with a larger budget and a taste for higher quality Mexican food can choose to eat at burrito joint.
Hollister apple farm does not have a differentiated product to sell because Red Delicious apples are widely available at grocery stores.
This apple farm is part of a competitive market.
The brand has some pricing power.
Hollister is an example of a monopolistic firm.
It is subject to economies of scale.
The local water company is a monopolist.
There is a place between competitive markets which produce an efficient output at low prices and monopoly which produces an inefficient output at high prices.
When facing monopolistic competition, we consider the outcomes that individual firms can achieve in the short and long run.
We can compare the long- run equilibrium result with that of competitive markets if we understand how monopolistic competition works.
A firm that sells a differentiated product has some market power.
In perfect competition, each firm sells the same product, so competitors' products are perfect replacements, which means that demand is elastic.
In monopolistic competition, each competitor provides a differentiated product, so competitors' products are imperfect replacements for one another, which means that demand is flatter than monopoly.
Like a monopolist, the monopolistic competitor uses the profit- maximizing rule to determine the best price to charge and the best quantity to produce.
Firms are free to enter an industry if they see a potential for profits or if they are making losses.
Entry and exit regulate how much profit a firm can make.
You own a fast food restaurant in North Caro lina.
Your business is making money.
A Five Guys opens up across the street.
Some of your customers will switch to Five Guys, while others will still prefer your fare.
Your profit will be hit.
Whether or not you stay in business depends on how much you lose.
To understand how a business owner makes a decision, we need to look at the long- and short-run implications of monopolistic competition.
The firm makes a profit.
The same firm incurred a loss after a new competitor opened nearby.
A single monopolistically competitive firm can make a profit or lose money depending on demand conditions.
The marginal cost curve and average total cost curve are the same in both panels because we are considering the same firm.
The location of the demand curve and marginal revenue curve are the only differences.
The firm can make a profit if the demand is high.
The firm experiences a loss because there isn't enough demand.
The calculation establishes the output along the dashed line.
The best price to charge is determined by following the dashed horizontal line from the demand curve to the vertical axis.
The firm makes a short- run economic profit if the price is greater than average total cost.
There is a different situation in panel b.
The firm experiences a short run economic loss because of P ATC.
The marginal cost and average total cost curves are the same in both panels because we are considering the same firm.
The only difference is the location of the demand and marginal revenue curves.
The firm can make a profit if the demand in panel is high.
Maybe too many customers have switched to the new Five Guys because there is not enough demand.
If demand is too low, the firm may not be able to price its product high enough to make a profit.
Competition will drive economic profit to zero in the long run if firms can easily enter and exit a market.
You should be familiar with this dynamic from our previous discussions.
The demand for an individual firm's product will be caused by the larger supply of competing firms.
It is no longer possible for existing firms to make an economic profit as more firms enter the market.
A reverse process happens when a market is experiencing a loss.
Some firms leave the industry.
The remaining firms experience an increase in demand when consumers have fewer options.
Firms no longer experience a loss when demand increases.
The market is shown in Figure 12.2.
The price is equal to the average total cost of production at the profit- maximizing rate of output.
There is no reason for firms to enter or exit the industry at this point in the market's evolution.
In the long run, profits and losses are not possible where entry and exit exist.
monopolistic competition is similar to a competitive market.
Firms are earning zero economic profit, as noted by P = ATC along the vertical axis.
There is no reason for firms to enter or leave the market at this point.
The firm's success will attract competitors, like Five Guys, to enter the market.
The short- run profits that Hardee's enjoys will erode as a result.
Other competitors will be encouraged to enter if profits occur in the short run, while some existing firms will be forced to close.
Both monopolistic competition and competitive markets drive economic profit to zero in the long run.
monopolistic competitors have some market power which is important.
Pricing and output decisions are compared in this section.
We look at issues of scale and output.
Competitive firms have market power that allows them to charge more than other firms.
There are two main differences between a competitive market and monopolistic competition.
Because P is greater than MC, monopolistic competition produces markup.
The output in monopolistic competition is smaller than the efficient scale.
The firm's output is equal to the most efficient scale in a competitive market.
In a market characterized by monopolistic competition, the price is greater than the marginal cost of making one more unit.
There is a difference between P and MC.
When a firm has market power, a mark up is possible.
The focus should be on bottled water.
Special packaging is used by other companies.
Consumers pay more for bottled water because of the higher price.
The point of tangency in a competitive market is different from the point of tangency in a monopolistic competitor.
Under monopolistic competition, the point where P + ATC is higher.
The panel shows the demand curve at ATC's lowest point in a competitive market.
We can say that a competitive market produces higher prices than a monopolistic one.
Entry and exit do not guarantee the lowest price, only that the price is equal to the average cost of production.
The lowest average total cost of production is always the price in a competitive market.
Under monopolistic competition, this is not the case.
Cheap food is cheap for a reason.
There will be no economic profit if firms charge more for better food.
Average total costs are equal in a competitive market.
Each firm must set its price equal to the minimum point on the average total cost curve in order to guarantee this result.
If a corn farmer tried to sell a harvest for more than the market price, he wouldn't get any customers.
A monopolistic competitor in a food court enjoys market power because some customers prefer its product, which allows food court vendors to charge more than the lowest average total cost.
The minimum efficient scale is less than the profit- maximizing output.
Competitive firms can produce more output at a lower cost.
They would have to lower their prices.
It is more profitable for a competitor to operate with excess capacity because a lower price decreases the firm's marginal revenue.
Competition produces a higher price and a lower level of output.
We looked at efficiency as a way to determine if a firm's decisions are in line with an output level that is beneficial to society.
The average total costs of a monopolistically competitive firm are higher than those of a firm in a competitive market.
This result isn't efficient.
To achieve efficiency, a monopolistic firm could lower its price.
Perrier's goal is to make a profit, so there is no incentive for the firm to lower its price.
The second source of inefficiency is the Markup.
We've seen that for a firm that maximized output at the profit level, P > MC by an amount equal to the markup.
The consumer's willingness to pay is reflected in the price.
Consumers would benefit from a reduced price and a decrease in the spread between the price and the marginal cost.
The output level would benefit the most consumers if the firm did away with the markup.
This result wouldn't be practical.
The firm would lose money if the demand curve is below the average total cost curve.
It is not reasonable to expect a firm to pursue a pricing strategy that will benefit its customers at the expense of its own profit.
Government regulation could increase efficiency.
The government regulates monopolists to reduce market power.
Competitive firms can't make a long- run economic profit like monopolists because they have a limited amount of market power.
In addition, regulating the prices that firms can charge would put a lot of them out of business.
We are talking about firms in the fast- food industry.
Fewer places for consumers to grab a quick bite would be a result of doing away with a significant percentage of these firms.
A host of problems like those we discussed for monopoly would be created by regulating monopolistic competition through marginal cost pricing.
The government would need to find a way to subsidize the regulated firms if marginal cost pricing is implemented.
The inefficiencies present in monopolistic competition do not warrant government action because the only way to fund these subsidies would be higher taxes.
Products sold under monopolistic competition are more differentiated than those sold in a competitive market and less differentiated than those sold under monopoly.
Competitive markets where firms sell identical products, have no market power, and face a perfectly elastic demand curve are at one end of the extremes.
There is a monopolist that sells a unique product without good substitute and faces a steep downward sloping demand curve.
Two monopolistic competitors are shown in Figure 12.4.
Product Differentiation, Excess Capacity, and Efficiency Firm A enjoy more.
It has more capacity and is less efficient as a result.
Firm B sells a product that is slightly different from its competitors.
Consumers have weak preferences about which firm to buy from, and demand is elastic.
There is a small amount of excess capacity and a more efficient result.
When the firm has an attractive location, style, type, or quality of product that is in high demand among consumers and that competitors cannot easily duplicate, there is a Monopolistic Competition and Advertising level of differentiation.
H&M is one of the good examples.
The demand curve is inelastic because consumers have strong brand loyalty for the clothes these firms sell.
The steep slope of the demand curve means that the point of tangency between the demand curve and the average total cost curve occurs at a high price, which produces a large amount of excess capacity.
Firm B sells a product that is slightly different from its competitors.
Three companies that sell discounted clothes are T.J.Maxx, Ross, and Marshalls.
Weak preferences for a particular firm is something consumers are willing to pay for.
punch pizza is a small upscale chain that uses wood- fired ovens.
There is a cultlike following for Punch Pizza in the Twin Cities.
That loyalty leads to inelastic demand.
The best Neapolitan Punch Pizza uses wood- fired ovens.
Pizza Hut has a taste that appeals to a broader group of customers and is located in the middle of the pizza market.
Pizza Hut's customers are more price sensitive because they can find many other places that serve the same product.
The marginal cost of making pizza at both places is the dough, the topping, and the wages for labor.
Pizza Hut has a streamlined pizza assembly.
The marginal cost of Punch Pizza is relatively low.
The prices at Pizza Hut are lower than at Punch Pizza.
The difference between the price charged and the marginal cost of production is greater at Punch Pizza than at Pizza Hut.
The relatively flat nature of the demand curve means that the point of tangency between demand and average total cost can be found at a relatively low price.
Competition leads to more choice and variety for consumers.
Reducing inefficiency by lowering the prices that monopolistically competitive firms can charge will have the consequence of limiting the product variety in the market.
It sounds like a small price to pay for increased efficiency.
Imagine a world without clothes.
Consumers want to express their individuality is one of the reasons fashions go out of style.
Consumers are willing to pay more for variety in order to look different from everyone else.
Advertising is part of daily life.
It's a cost of doing business in many industries because it's a means by which companies compete.
All of the advertising spots are aired during the Super Bowl.