What are the major features of monopolistic competition compared to pure competition and pure monopoly?
How would you compare and contrast monopolistic competition as they relate to the cell phone industry, major oil/gasoline retailers, and IPOD type devises from McIntosh and its competitors?
Answer:
In a perfectly competitive industry producers are price takers. Allocative efficiency occurs at the point where Price = Marginal Cost. At this point producers are operating at the lowest average cost and this captures an efficiency that is passed on to consumers in lower prices - which is intuitive that prices would be lower if there are a lot of firms competing.
A monopolistically competitive market is basically the same except all the products being produced are heterogeneous and companies don't compete on price as much as trying to differentiate their product (although the actual differences may be negligible). On the other hand, the producer can affect the price (assumption in perfect competition is that no producer/consumer affects market price of goods).
For example.cell phones: cell phones all basically serve the same function, but companies try to differentiate themselves by making their phones "special" - like the Razr or the Chocolate. Neither phone does something earth shattering and yet people crave them. Meanwhile, producers can limit the supply (production and number of products distributed in areas) and therefore can set the price high. When the Pink Razr was released it cost about $100 more than you can buy it at a store today. This is mainly because they lost their competitive advantage b/c it's easy for competitors to develop substitutes. A unique looking phone isn't a sustainable competitive advanantage - so the lower the price and accept the lower profit margin until the next big thing.
Since monopolistic competition - like the cell phone market - are based on creating differentiated products (in the mind of consumers) it drives advertising - which phones do you see on T.V? How much were they six months ago versus today? Are those phones REALLY THAT DIFFERENT? Nope! = monopolistic competition.
Goliaths v niche Davids.
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Answer:
In a perfectly competitive industry producers are price takers. Allocative efficiency occurs at the point where Price = Marginal Cost. At this point producers are operating at the lowest average cost and this captures an efficiency that is passed on to consumers in lower prices - which is intuitive that prices would be lower if there are a lot of firms competing.
A monopolistically competitive market is basically the same except all the products being produced are heterogeneous and companies don't compete on price as much as trying to differentiate their product (although the actual differences may be negligible). On the other hand, the producer can affect the price (assumption in perfect competition is that no producer/consumer affects market price of goods).
For example.cell phones: cell phones all basically serve the same function, but companies try to differentiate themselves by making their phones "special" - like the Razr or the Chocolate. Neither phone does something earth shattering and yet people crave them. Meanwhile, producers can limit the supply (production and number of products distributed in areas) and therefore can set the price high. When the Pink Razr was released it cost about $100 more than you can buy it at a store today. This is mainly because they lost their competitive advantage b/c it's easy for competitors to develop substitutes. A unique looking phone isn't a sustainable competitive advanantage - so the lower the price and accept the lower profit margin until the next big thing.
Since monopolistic competition - like the cell phone market - are based on creating differentiated products (in the mind of consumers) it drives advertising - which phones do you see on T.V? How much were they six months ago versus today? Are those phones REALLY THAT DIFFERENT? Nope! = monopolistic competition.
Goliaths v niche Davids.
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