Download Managerial Economics & Business Strategy

Managerial Economics &
Business Strategy
Chapter 8
Managing in Competitive, Monopolistic,
and Monopolistically Competitive
Markets
Managing a Monopolistically
Competitive Firm
• Like a monopoly, monopolistically competitive
firms


have market power that permits pricing above marginal cost.
level of sales depends on the price it sets.
• But …


The presence of other brands in the market makes the demand for
your brand more elastic than if you were a monopolist.
Free entry and exit impacts profitability.
• Therefore, monopolistically competitive firms
have limited market power.
Marginal Revenue Like a
Monopolist
P
100
TR
Unit elastic
Elastic
Unit elastic
1200
60
Inelastic
40
800
20
0
10
20
30
40
50
Q
0
10
20
30
40
MR
Elastic
Inelastic
50
Q
Can we use the theory?
•
•
•
Number 9
The CEO of a major automaker overheard one of its
division managers make the following statement
regarding the firm’s production plans: “In order to
maximize profits, it is essential that we operate at the
minimum point of our ATC curve”. If you were the
CEO of the automaker, would you praise or chastise the
manager?
Chastise the manager. Profit maximization requires
producing where MR = MC.
Monopolistic Competition:
Profit Maximization
• Maximize profits like a monopolist


Produce output where MR = MC.
Charge the price on the demand curve that corresponds to that
quantity.
Three cases (graphically) with
Monopolistic
• Profit

Price > ATC
• Break-even (Zero Economic Profit, Normal Profit)

Price = ATC
• Loss and continue to operate

ATC > Price
Short-Run Monopolistic
Competition
MC
$
ATC
Profit
PM
ATC
D
QM
MR
Quantity of Brand X
Long Run Adjustments?
• If the industry is truly monopolistically
competitive, there is free entry.


In this case other “greedy capitalists” enter, and their new brands
steal market share.
This reduces the demand for your product until profits are
ultimately zero.
Long-Run Monopolistic
Competition
Long Run Equilibrium
(P = AC, so zero profits)
$
MC
AC
P*
P1
Entry
MR
Q1 Q*
MR1
D
D1
Quantity of Brand
X
Monopolistic Competition
The Good (To Consumers)

Product Variety
The Bad (To Society)


P > MC
Excess capacity
• Unexploited economies of scale
The Ugly (To Managers)

P = ATC > minimum of average costs.
• Zero Profits (in the long run)!