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Monopolistic Competition - Essay Example

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Monopolistic Competition I. Monopolistic Competition: Definition and Features A monopolistic competition is a market where many firms sell products that are similar but not identical (Mankiw 2007, p. 40). Mankiw (2007, p. 341) identified four types of market structure (monopoly, oligopoly, perfect competition, and monopolistic competition) and pointed out that in a monopolistic competition, there are many firms selling differentiated products for the same product (as pointed out earlier, the products are “similar but not identical”)…
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Download file to see previous pages Figure 1 is illustrative for differentiating market structure and the chapters refer to the chapters in Mankiw (2007). Figure 1. Gregory Mankiw on four types of market structure Source: Mankiw (2007, p. 341) Mankiw (2007, p. 341) elaborated that there is no “magic number” that would allow us to determine what is “few” or “many” firms as reality is never as precise as theory. Samuelson and Nordhaus (2001, p. 168) had viewed monopolistic competition as “imperfect competition”. Further, they described the type of competition to be “very common” (Samuelson and Nordhaus 2001, p. 187). Earlier, Hunt (2000, p. 41) reported that the theory of monopolistic competition was developed by Edward Chamberlin in 1933 in which the latter complained that his theory was wrongly lumped with Joan Robinson’s theory of imperfect competition. In particular, Hunt (2000, p. ...
In contrast, through product differentiation, a firm in a monopolistic competition has a portion of the market in which he has a monopoly. For instance, the pants industry has Levis and Wrangler, for example, and each brand has a set of customers loyal to the brand. For their respective loyal customers, each firm is a monopoly facing a specific demand curve. Varian (2005, p. 461) pointed out in a monopolistic competition, “each firm faces a downward-sloping demand curve for its product.” This is illustrated in Figure 2. Figure 2. Monopolistic Competition in the Short Run Source: Mankiw 2007, p. 369 A diagram similar to Figure 2 of the earlier page is in Depken (2006, p. 199) as well as in Taylor (2007, p. 293). In Figure 2 of the earlier page, it is clear that a monopolistic competitive firm maximizes profit where its marginal revenue equals marginal cost (Mankiw 2007, p. 369). However, as shown in Figure 2, this can lead to a loss or profit, depending on the costs curves confronting the firm (Mankiw 2007, p. 369). The left panel of Figure 2 in the immediately preceding page indicates a profit for the monopolistic competitive firm while the one on the right panel of Figure 2 indicates a loss. Meanwhile, it must be pointed out that a much earlier book, Eckert and Leftwich (1988, p. 212) had described a much more elastic demand curve for a monopolistic competition or a demand curve that is close to a horizontal straight line to reflect that demand can either significantly drop or increase with prices changes in a monopolistic competition. In other words, this means that the demand curve facing the competitively monopolistic firm in the short run is highly elastic. Subject to ...Download file to see next pages Read More
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