Monopolistic Competition Chapter 17. Edward Chamberlin Theory of Monopolistic Competition (1933)
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Transcript of Monopolistic Competition Chapter 17. Edward Chamberlin Theory of Monopolistic Competition (1933)
Between Monopoly Between Monopoly and Perfect Competitionand Perfect Competition
Like monopoly:
Unique product.
Downward sloping demand & MR curves.
Price > MC
Like perfect competition:
Other products are substitutes—although not perfect substitutes.
Free entry and exit.
Economic profits are driven to zero.
Figure 1a Monopolistic Competitors in the Figure 1a Monopolistic Competitors in the Short RunShort Run
Figure 1b Monopolistic Competitors in the Figure 1b Monopolistic Competitors in the Short RunShort Run
Entry and Exit
Entry increases the availability of substitutes and shifts the demand curve to left.
Exit reduces the availability of substitutes and shifts the demand curve to the right.
Figure 2 A Monopolistic Competitor in the Figure 2 A Monopolistic Competitor in the Long RunLong Run
Advertising
• Pros
Provides information.
Promotes competition.
• Cons
Increases costs.
Information can be misleading.