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CHAPTER 26 -- Part 1: MONOPOLISTIC
You should know LO1 after reading this chapter.
monopolistically competitive firms maximize profits
Economic profits tend to be zero in monopolistic competition.
It is possible that it will be able to maintain an economic profit for many years.
Starbucks has over 12,000 locations on four continents, making it the biggest coffee bar chain in the country.
We focus on where consumers congregate in this chapter.
Even if Starbucks makes price and output decisions, the market will never have outcomes that result.
Great market power is our goal.
The best Starbucks can hope for is a little brand loyalty.
We will see why we can't escape the petitive firm in this chapter.
"Many" isn't an exact specification.
It's best understood as being between the few that describe oligopoly and the hordes that describe perfect competition.
The four-firm concentration ratios of oliggopolies are very high.
There is less concentration in monopolistic competition by con market firms.
The combined market share of the top four firms will typically be in the services but each has a range of 20 to 40 percent.
Starbucks has less than 15 percent of the coffee bar business.
The top four coffee bar outlets have a concentration ratio of less than 30 percent.
McDonald's might be seen as a monopolistic competitor.
In the United States, there are over 200,000 fast-food outlets.
The broader fast-food market is the appropriate basis for measuring market power and concentration if consumers consider pizzas, Chinese carry-out, and delis as close replacements for hamburgers.
The individual firms aren't powerless despite the low concentration rates.
Modest concentration ratios and low entry barriers are found in industries characterized by four-firm concentration ratios.
"The company is selling a product that has become part of our fromlukewarm same-store sales, to a bungled venture into movies, to daily lives," said Koerber, an analyst at JMP Securities.
The price increases drink prices.
In North America, Koerber and many other analysts operated stores.
Starbucks seems to support this optimism.
If you have a competitive or macroeconomic pound, you won't be able to raise the price of its coffee beans by 50 cents.
The timing is odd.
Starbucks has been dealing with labor disputes.
Tim Horton's is the latest restaurant chain to enter its territory.
The power to increase price is held by a firm that is monopolistic.
Less unit sales will decline if the brand loyalty is greater.
Competitive firms increase the price of their product and lose customers.
A perfectly competitive firm has a horizontal demand curve for its output.
A monopolistically competitive firm has a downward-sloping demand curve.
Starbucks has some control over the price of its output.
There are more firms in monopolistic competition.
This independence is due to the fact that the effects of any one firm's behavior will be spread over many other firms.
The independence of monopolistic competitors means that they don't have to worry about reprisals.
The oligopolist's curve results from the likelihood that rival oligopolists would match any price reduction, but not necessarily any price increase.
Market shares of rival firms aren't altered by another market if producers enter a listic competition.
It's easy to leave the industry.
You need boiling water, fresh beans, and cups.
You can save money by using a pushcart.
Starbucks and other coffee bars have low entry barriers.
Economic profits are pushed toward zero by low entry barriers.
We should anticipate some distinctive behavior because of the unique structural characteristics of monopolistic competition.
The downward-sloping demand curve distinguishes a monopolistically competitive firm from a purely competitive firm.
There are features that make a product interchangeable.
One firm's attempt to raise its appear different from competing appear different from competing price will drive customers to other firms.
Consumers think that its output is different from that of other firms in the industry.
The fast-growing bottled water industry is an example of this.
Effective marketing has led to the rise ofPepsi and Coke as the leaders in the bottled water market.
Clever advertising campaigns have convinced consumers that the branded waters are better than hundreds of other bottled waters.
The price of bottled waters can be raised by bothPepsi and Coke without losing customers to their rivals.
The demand curve facing a monopolistically competitive firm looks very similar to the demand curve facing a monopolist.
There's a big difference.
Until the marketers get hold of it, water is water.
Consumers are trading up.
Kellam Graitcer, Dasani brand manager at Coca, said that a humble commodity that falls from the sky brand becomes something else.
This summer marks the biggest-ever ad barrage for Dasani, as the two companies are likely to spend about $20 million.
Coke's water brand and Aquafina are bottled by Pepsi-Cola Co.
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monopolistic competitors establish brand loyalty by differentiating their products.
Producers can control the price of their products with brand loyalty.
The extent of power a monopolistically competitive firm has depends on how successful it is in differentiating its product from other firms.
Consumers are less likely to switch brands when price is increased if a firm can establish brand loyalty.
There is brand loyalty even when products are almost the same.
A standardized product is gasoline.
Most consumers buy one brand.
The price of gasoline can be raised by a penny or two a gallon without losing customers to competitors.
Cigarettes, toothpaste, and even laxatives have high brand loyalty.
If a competing brand's price was cut by 50 percent, consumers would stick with their brand.
Brand loyalty is less strong for paper towels and less so for tomatoes.
Product differentiation has been used to establish brand loyalty in the computer industry.
The mix of functions performed on a computer can be varied, as can its appearance.
It is possible to convince consumers that one computer is smarter, more efficient, or more versatile than another.
A single firm may be able to differentiate itself by providing faster or more courteous customer service.
Without fear of great changes in unit sales, a firm can alter its own price.
Firms enter the industry more often.
The market shares decline.
MR and MC are still considered by firms.
Consumers' tendency to buy the same brand is a symptom of brand loyalty.
Almost 9 out of 10 Macintosh users stick with Apple products when they upgrade or replace their computer components.
Purchase rates are 74 percent for Dell, 72 percent for Hewlett-Packard, and 66 percent for Gateway.
Return customers are also counted by Starbucks.
monopolistically competitive firms must expand their offerings to maintain brand loyalty.
Entry barriers are low.
It was easy for fast-food companies to enter the coffee business once they saw how profitable Starbucks was.
To maintain its market dominance, Starbucks had to expand its menu.
Firms sought greater product differentiation as a result of the breakfast war.
Increased service is more cost-effective than price competition because of the low cross-price elasticity of demand in monopolistically-competitive markets.
The price differences between computer brands are a symptom of brand loyalty.
Consumers are willing to pay more for an HP- or Dell- branded computer than a no-name computer.
Consumers are willing to pay more for Starbucks coffee or Ben and Jerry's ice cream, even when they are cheaper, because of the same reason.
Both types of firms face downward-sloping demand.
King has a breakfast value menu.
A breakfast value ground is the breakfast table.
omelet sandwiches are one-third of Subway's stores.
Ron Paul, president of and stagnation, says that a piece of the $78.6 billion breakfast market that is for new growth goal is to boost same-store sales to get more fast-food giants.
Technomic is a consulting firm.
The hot breakfast sandwiches are the first of their kind.
Wendy's is increasing its breakfast offerings.
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Competitive firms have to differentiate their products to maintain brand loyalty.
Brand profiles are created by variations in products and services.
The profits are good news for the firm.
Firms in monopolistic competition will flock to the industry if they make an economic profit.
As new firms enter the industry, supply increases and prices will be pushed down the market demand curve.
More firms enter because of that price.
The impact on firms already in the market will be different from the impact in competitive markets.
Existing firms will lose customers as new firms enter a monopolistically competitive industry.
monopolistically competitive firm will have to make a new production decision as demand curve shifts left It doesn't need to charge the same price or coordinate its output with its rivals.
monopolistically competitive firms have independent power over their captive customers.
There are low barriers to entry.
If economic profits are available, the demand firms will enter affects the entry of new firms.
The average price is available.
Economic profits will be eliminated if leftward shifts of the demand curve continue.
The firm would incur losses if the demand curve shifted farther left.
The price would exceed ATC at some rates of output if the demand curve were positioned farther to the right.
The disappearance of economic profits is inevitable if other firms can enter the industry.
Firms will enter if the demand line is above ATC.
When the firm's demand is left and below the ATC curve, firms will leave.
The longrun equilibrium has been established once entry and exit cease.
There are no economic profits in monopolistic competition.
Long-run profits are zero in perfect competition.
The demand curve facing each firm slopes downward in monopolistic competition.
It can't be related to the ATC curve at its lowest point, as in perfect competition.
The minimum-cost rate of production is less than the output rate.
The monopolistically competitive industry isn't producing at the minimum cost.
Industrywide excess capacity is a symptom of inefficiencies associated with monopolistic competition.
Firms try to gain market share by building more outlets.
The typical firm is producing at a rate of output that is less than its minimum-ATC output rate.
The resources used to develop excess capacity could be used for other purposes.
The flawed price signal that is transmitted in imperfectly competitive markets leads to the misallocation of resources in monopolistic competition.
It will always price its output above the level of marginal costs, just like firms in an oligop equal to their marginal cost.
The price always exceeds the opportunity cost.
Consumers respond to flawed signals by demanding less goods from monopolistically competitive industries.
We end up with the wrong mix of resources.
The model of perfect competition delivers both minimum average total cost and efficient price signals.
Market behavior is affected by industry structure.
Different kinds of firms compete for sales and profits.
Firms compete on the basis of price.
Firms that achieve greater efficiency and offer their products at the lowest possible prices win.
Firms in imperfectly competitive markets do not compete in the same way.
The demand curve facing each firm in the oligopolies causes price reductions.
There is a reluctance to engage in price competition in monopolistic competition.
Because each firm has its own captive market, price reductions by one firm won't induce many consumers to switch brands.
In monopolistic competition, price reductions aren't very effective in increasing sales or market share.
Firms engage in nonprice competition.
An imperfectly competitive firm usually uses advertising to enhance its own product's image, thereby increasing the size of its captive market.
The Coca-Cola Company hires rock stars to create an image of Coke being superior to other soft drinks in order to create brand loyalty.
The company spent $8.2 billion.
P&G hopes that these expenditures will shift the demand for its products to the right, while possibly making it less price-elastic.
In the 1990s, America Online, Yahoo!, and Amazon.com spent hundreds of millions of dollars to establish brand loyalty in crowded dot.com markets.
Perfectly competitive firms have no incentive to advertise because they can individually sell their output at the current market price.
American consumers drink 40 million soft drinks a day.
The advertising seems to work.
Half of all soft drink is produced by The Coca-Cola Company.
They think that soft drinks are more popular than real cola, and that they will buy every market supply of real cola.
Few of these loyalists can be persuaded to switch from cola to another.
Advertising is the main weapon in thecola wars.
It takes $2 billion a year to convince consumers that their favorite cola tastes good.
The majority of people who swore loyalty are superior.
In a taste test, both Coke andPepsi picked the wrong cola.
Brand loyalty is created by advertising.
Even if competitors offer nearly identical products, loyal consumers will still buy the same brand all the time.
The Toyota demand curve is facing the firm.
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Brand loyalty is reflected in larger demand and smaller price elasticity.
A successful brand image can be used to sell related products.
There are other forms of nonprice competition.
In almost every industry, brands are important in a different way.
The full array can be brought to a computer screen with a click of the mouse.
An ambassador is when companies enter new markets.
A brand can command a premium price for customers and a premium stock price for investors.
Brand names help a firm maintain a base of loyal customers.
Heavy advertising has resulted in worldwide recognition for these brands.
Not only did airlines compete by advertising, but they also offered "special" meals, movies, more frequent or convenient departures, and faster ticketing and baggage services.
Surely airline passengers enjoyed their meals, services, and departure times.
These services were not free.
There were opportunity costs.
The "special" services stimulated by nonprice competition replaced cheaper fares for air travelers.
The resources used in advertising and other forms of nonprice competition could be used to produce larger quantities of desired goods and services.
A third of the price of breakfast cereals is absorbed by marketing costs.
Consumers end up with more advertising but less cereals because of this behavior.
They can save money by buying store brand or generic cereals.
Athletes or cartoon characters have never endorsed such products.
Consumers pay more for branded cereals.
Advertising wars between powerful corporations won't end soon, according to models of imperfect competition.
Tomorrow's jingles will be as ubiquitous as they are today.
Many monopolistic firms exist.
Entry eliminates competition and economic profit.
The demand for the output of such industries tends to be low because of the concentration ratio.
Each firm has a high degree of minimum average cost due to brand loyalty, rela tions, and flawed price signals.
The resources competitive firm has depends on how successful it is in nonprice competition.
There is a mix of output in competitive mar 3.
People are willing to pay more for ice.
The World View says what gives tests.
There are numerical and graphing problems in the Student Problem Set at the back of the book.
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