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Chinese Food Funeral Services Monopolistic Competition Characteristics of Monopolistic Competition 1. Many sellers 2. Product differentiation 3. Free entry and exit The Market for Chinese Food in NYC 1. Many sellers: Citysearch lists 1,832 Chinese restaurants in NYC 2. Product differentiation: For people who want it… spicy Kosher fast bland 3. Free entry and exit: restaurants are constantly opening and closing. Cost Rating→$ $ (under $20) $$ ($21-$30) $$$ ($31-$40) $$$$ (above $40) Source: CitySearch (21 reviews) (9 reviews) (1 reviews) (7 reviews) (2 reviews) Source: CitySearch Differentiated Products Each Chinese restaurant produces meals that are slightly different from those of other Chinese restaurants. Rather than being a price taker, each Chinese restaurant faces a downward-sloping demand curve. Free Entry or Exit Firms can enter or exit the market without restriction. The number of firms in the market adjusts until economic profits are zero. Price ($ per meal) MC D 0 100 200 300 400 500 600 700 Chinese Meals (number per week) 800 900 1000 MC P=ATC ATC D MR 0 100 200 300 400 500 600 700 Qπ Chinese Meals (number per week) 800 900 1000 Over the last few years, a large number of Chinese from Fujian Province have been smuggled into New York City. Their “desperation” makes “them highly desirable as laborers” (NYTimes, 7/22/2001). Indeed, signs litter the windows of Chinese restaurants advertising jobs for “hardworking Fujianese,” including the front window of the Silk Road Palace. MC2 Total Revenue = A+B Total Cost = B Econ Profits = A P2 ATC(Qπ2) A ATC2 B D MR 0 100 200 300 400 500 600 700 Qπ2 Chinese Meals (number per week) 800 900 1000 Short-run economic profits encourage new Chinese Restaurants to enter the market. This: • Increases the variety in Chinese meals. • Reduces demand faced by restaurants already in the market. • Incumbent restaurants’ demand curves shift to the left. • Demand for the incumbent restaurants’ meals fall, and their profits decline. The Long-Run Equilibrium • Chinese restaurants will enter and exit until the firms are making exactly zero economic profits. MC2 The demand curve is tangent to the ATC curve. P3= ATC ATC2 And this tangency lies vertically above the intersection of MR and MC. MR3 0 100 200 300 400 500 D3 600 700 Qπ3 Chinese Meals (number per week) 800 900 1000 Monopolistic versus Perfect Competition • There are two noteworthy differences between monopolistic and perfect competition: – Excess capacity – Markup over marginal cost MC2 The demand curve is tangent to the ATC curve. P3= ATC ATC2 And this tangency lies vertically above the intersection of MR and MC. MR3 0 100 200 300 400 500 D3 600 700 Qπ3 Chinese Meals (number per week) 800 900 1000 Monopolistic versus Perfect Competition • Excess Capacity – Free entry results in competitive firms producing at the point where average total cost is minimized, which is the efficient scale of the firm. . – In monopolistic competition, output is less than the efficient scale of perfect competition. Monopolistic versus Perfect Competition (a) Monopolistically Competitive Firm Price (b) Perfectly Competitive Firm Price MC MC ATC ATC P P = MC MR 0 Quantity produced Efficient scale P = MR (demand curve) Demand Quantity 0 Quantity produced = Efficient scale Quantity Monopolistic versus Perfect Competition • Markup over Marginal Cost – For a competitive firm, price equals marginal cost. – For a monopolistically competitive firm, price exceeds marginal cost. Monopolistic versus Perfect Competition (a) Monopolistically Competitive Firm Price (b) Perfectly Competitive Firm Price MC MC ATC ATC Markup P P = MC P = MR (demand curve) Marginal cost MR 0 Quantity produced Demand Quantity 0 Quantity produced Quantity Monopolistic Competition and the Welfare of Society • There is the normal deadweight loss of monopoly pricing in monopolistic competition caused by the markup of price over marginal cost. • However, it may be that people are willing to incur the cost to have the greater variety offered by monopolistically competitive markets.
