最新版微观经济学课件英文版princ-ch16-presentation

MonopolisticCompetitionEconomicsPRINCIPLESOFN.GregoryMankiwPremiumPowerPointSlides

byRonCronovich16MonopolisticCompetitionEconomInthischapter,

lookfortheanswerstothesequestions:Whatmarketstructuresliebetweenperfectcompetitionandmonopoly,andwhataretheircharacteristics?Howdomonopolisticallycompetitivefirmschoosepriceandquantity?Dotheyearneconomicprofit?Inwhatwaysdoesmonopolisticcompetitionaffectsociety’swelfare?Whatarethesocialcostsandbenefitsofadvertising?11MONOPOLISTICCOMPETITIONInthischapter,

lookfortheIntroduction:

BetweenMonopolyandCompetitionTwoextremesPerfectcompetition:manyfirms,identicalproductsMonopoly:onefirmInbetweentheseextremes:imperfectcompetitionOligopoly:onlyafewsellersoffersimilaroridenticalproducts.Monopolisticcompetition:manyfirmssellsimilarbutnotidenticalproducts.02MONOPOLISTICCOMPETITIONIntroduction:

BetweenMonopoCharacteristics&Examples

ofMonopolisticCompetitionCharacteristics:ManysellersProductdifferentiationFreeentryandexitExamples:apartmentsbooksbottledwaterclothingfastfoodnightclubs03MONOPOLISTICCOMPETITIONCharacteristics&Examples

ofComparingPerfect&Monop.Competitionyesnone,price-takerfirmhasmarketpower?downward-slopinghorizontalDfitsyesyesfreeentry/exitmanymanynumberofsellersMonopolisticcompetitionPerfectcompetition04MONOPOLISTICCOMPETITIONComparingPerfect&Monop.ComComparingMonopoly&Monop.Competitionyesyesfirmhasmarketpower?downward-slopingdownward-sloping

(marketdemand)Dfitsyesnofreeentry/exitmanyonenumberofsellersMonopolisticcompetitionMonopoly05MONOPOLISTICCOMPETITIONComparingMonopoly&Monop.CoprofitATCPAMonopolisticallyCompetitiveFirmEarningProfitsintheShortRunThefirmfacesadownward-sloping

Dcurve.AteachQ,MR<P.Tomaximizeprofit,firmproducesQwhereMR=MC.Thefirmusesthe

DcurvetosetP.QuantityPriceATCDMRMCQ06MONOPOLISTICCOMPETITIONprofitATCPAMonopolisticallyClossesAMonopolisticallyCompetitiveFirm

WithLossesintheShortRunForthisfirm,

P<ATC

attheoutputwhereMR=MC.Thebestthisfirmcandoistominimizeitslosses.QuantityPriceATCQPATCMCDMR07MONOPOLISTICCOMPETITIONlossesAMonopolisticallyCompeMonopolisticCompetitionandMonopolyShortrun:Undermonopolisticcompetition,

firmbehaviorisverysimilartomonopoly.Longrun:Inmonopolisticcompetition,

entryandexitdriveeconomicprofittozero.Ifprofitsintheshortrun:

Newfirmsentermarket,

takingsomedemandawayfromexistingfirms,

pricesandprofitsfall.Iflossesintheshortrun:

Somefirmsexitthemarket,

remainingfirmsenjoyhigherdemandandprices.08MONOPOLISTICCOMPETITIONMonopolisticCompetitionandMAMonopolisticCompetitorintheLongRunEntryandexitoccursuntil

P=ATCandprofit=zero.NoticethatthefirmchargesamarkupofpriceovermarginalcostanddoesnotproduceatminimumATC.QuantityPriceATCDMRQMCMCP=ATCmarkup09MONOPOLISTICCOMPETITIONAMonopolisticCompetitorintWhyMonopolisticCompetitionIs

LessEfficientthanPerfectCompetition1.

ExcesscapacityThemonopolisticcompetitoroperatesonthedownward-slopingpartofitsATCcurve,

produceslessthanthecost-minimizingoutput.Underperfectcompetition,firmsproducethequantitythatminimizesATC.2.

MarkupovermarginalcostUndermonopolisticcompetition,P>MC.Underperfectcompetition,P=MC.010MONOPOLISTICCOMPETITIONWhyMonopolisticCompetitionIMonopolisticCompetitionandWelfareMonopolisticallycompetitivemarketsdonot

haveallthedesirablewelfarepropertiesofperfectlycompetitivemarkets.BecauseP>MC,themarketquantityisbelow

thesociallyefficientquantity.Yet,noteasyforpolicymakerstofixthisproblem:Firmsearnzeroprofits,socannotrequirethem

toreduceprices.011MONOPOLISTICCOMPETITIONMonopolisticCompetitionandWMonopolisticCompetitionandWelfareNumberoffirmsinthemarketmaynotbeoptimal,duetoexternaleffectsfromtheentryofnewfirms:Theproduct-varietyexternality:

surplusconsumersgetfromtheintroduction

ofnewproductsThebusiness-stealingexternality:

lossesincurredbyexistingfirms

whennewfirmsentermarketTheinefficienciesofmonopolisticcompetitionaresubtleandhardtomeasure.Noeasywayforpolicymakerstoimprovethemarketoutcome.012MONOPOLISTICCOMPETITIONMonopolisticCompetitionandW1. Sofar,wehavestudiedthreemarketstructures:perfectcompetition,monopoly,andmonopolisticcompetition.Ineachofthese,wouldyouexpecttoseefirmsspendingmoneytoadvertisetheirproducts?Whyorwhynot?2. Isadvertisinggoodorbadfromsociety’sviewpoint?Trytothinkofatleastone“pro”and“con.”ACTIVELEARNING1

Advertising1313MONOPOLISTICCOMPETITION1. Sofar,wehavestudiedthrAdvertisingInmonopolisticallycompetitiveindustries,productdifferentiationandmarkuppricing

leadnaturallytotheuseofadvertising.Ingeneral,themoredifferentiatedtheproducts,

themoreadvertisingfirmsbuy.Economistsdisagreeaboutthesocialvalueofadvertising.014MONOPOLISTICCOMPETITIONAdvertisingInmonopolisticallyTheCritiqueofAdvertisingCriticsofadvertisingbelieve:Societyiswastingtheresourcesitdevotestoadvertising.Firmsadvertisetomanipulatepeople’stastes.Advertisingimpedescompetition–

itcreatestheperceptionthatproductsare

moredifferentiatedthantheyreallyare,

allowinghighermarkups.015MONOPOLISTICCOMPETITIONTheCritiqueofAdvertisingCriTheDefenseofAdvertisingDefendersofadvertisingbelieve:Itprovidesusefulinformationtobuyers.Informedbuyerscanmoreeasilyfindandexploitpricedifferences.Thus,advertisingpromotescompetitionandreducesmarketpower.Resultsofaprominentstudy:

Eyeglassesweremoreexpensiveinstates

thatprohibitedadvertisingbyeyeglassmakers

thaninstatesthatdidnotrestrictsuchadvertising.016MONOPOLISTICCOMPETITIONTheDefenseofAdvertisingDefeAdvertisingasaSignalofQualityAfirm’swillingnesstospendhugeamounts

onadvertisingmaysignalthequalityofitsproduct

toconsumers,regardlessofthecontentofads.Adsmayconvincebuyerstotryaproductonce,

buttheproductmustbeofhighqualityforpeople

tobecomerepeatbuyers.Themostexpensiveadsarenotworthwhile

unlesstheyleadtorepeatbuyers.Whenconsumersseeexpensiveads,

theythinktheproductmustbegoodifthecompany

iswillingtospendsomuchonadvertising.017MONOPOLISTICCOMPETITIONAdvertisingasaSignalofQuaBrandNamesInmanymarkets,brandnameproductscoexistwithgenericones.Firmswithbrandnamesusuallyspendmoreonadvertising,chargehigherpricesfortheproducts.Aswithadvertising,thereisdisagreementabouttheeconomicsofbrandnames…018MONOPOLISTICCOMPETITIONBrandNamesInmanymarkets,brTheCritiqueofBrandNamesCriticsofbrandnamesbelieve:Brandnamescauseconsumerstoperceivedifferencesthatdonotreallyexist.Consumers’willingnesstopaymoreforbrandnamesisirrational,fosteredbyadvertising.Eliminatinggovtprotectionoftrademarks

wouldreduceinfluenceofbrandnames,

resultinlowerprices.019MONOPOLISTICCOMPETITIONTheCritiqueofBrandNamesCriTheDefenseofBrandNamesDefendersofbrandnamesbelieve:Brandnamesprovideinformationaboutqualitytoconsumers.Companieswithbrandnameshaveincentive

tomaintainquality,toprotectthereputationoftheirbrandnames.020MONOPOLISTICCOMPETITIONTheDefenseofBrandNamesDefeCONCLUSIONDifferentiatedproductsareeverywhere;examplesofmonopolisticcompetitionabound.Thetheoryofmonopolisticcompetitiondescribesmanymarketsintheeconomy,

yetofferslittleguidancetopolicymakerslookingtoimprovethemarket’sallocationofresources.021MONOPOLISTICCOMPETITIONCONCLUSIONDifferentiatedproduCHAPTERSUMMARYAmonopolisticallycompetitivemarkethas

manyfirms,differentiatedproducts,andfreeentry.Eachfirminamonopolisticallycompetitivemarkethasexcesscapacity–produceslessthanthequantitythatminimizesATC.Eachfirmchargesapriceabovemarginalcost.2222MONOPOLISTICCOMPETITIONCHAPTERSUMMARYAmonopolisticaCHAPTERSUMMARYMonopolisticcompetitiondoesnothaveallofthedesirablewelfarepropertiesofperfectcompetition.Thereisadeadweightlosscausedbythemarkupofpriceovermarginalcost.Also,thenumberoffirms(andthusvarieties)canbetoolargeortoosmall.Thereisnoclearwayforpolicymakerstoimprovethemarketoutcome.2323MONOPOLISTICCOMPETITIONCHAPTERSUMMARYMonopolisticcoCHAPTERSUMMARYProductdifferentiationandmarkuppricingleadtotheuseofadvertisingandbrandnames.Criticsofadvertisingandbrandnamesarguethatfirmsusethemtoreducecompetitionandtakeadvantageofconsumerirrationality.Defendersarguethatfirmsusethemtoinformconsumersandtocompetemorevigorouslyonpriceandproductquality.2424MONOPOLISTICCOMPETITIONCHAPTERSUMMARYProductdiffereMonopolisticCompetitionEconomicsPRINCIPLESOFN.GregoryMankiwPremiumPowerPointSlides

byRonCronovich16MonopolisticCompetitionEconomInthischapter,

lookfortheanswerstothesequestions:Whatmarketstructuresliebetweenperfectcompetitionandmonopoly,andwhataretheircharacteristics?Howdomonopolisticallycompetitivefirmschoosepriceandquantity?Dotheyearneconomicprofit?Inwhatwaysdoesmonopolisticcompetitionaffectsociety’swelfare?Whatarethesocialcostsandbenefitsofadvertising?2626MONOPOLISTICCOMPETITIONInthischapter,

lookfortheIntroduction:

BetweenMonopolyandCompetitionTwoextremesPerfectcompetition:manyfirms,identicalproductsMonopoly:onefirmInbetweentheseextremes:imperfectcompetitionOligopoly:onlyafewsellersoffersimilaroridenticalproducts.Monopolisticcompetition:manyfirmssellsimilarbutnotidenticalproducts.027MONOPOLISTICCOMPETITIONIntroduction:

BetweenMonopoCharacteristics&Examples

ofMonopolisticCompetitionCharacteristics:ManysellersProductdifferentiationFreeentryandexitExamples:apartmentsbooksbottledwaterclothingfastfoodnightclubs028MONOPOLISTICCOMPETITIONCharacteristics&Examples

ofComparingPerfect&Monop.Competitionyesnone,price-takerfirmhasmarketpower?downward-slopinghorizontalDfitsyesyesfreeentry/exitmanymanynumberofsellersMonopolisticcompetitionPerfectcompetition029MONOPOLISTICCOMPETITIONComparingPerfect&Monop.ComComparingMonopoly&Monop.Competitionyesyesfirmhasmarketpower?downward-slopingdownward-sloping

(marketdemand)Dfitsyesnofreeentry/exitmanyonenumberofsellersMonopolisticcompetitionMonopoly030MONOPOLISTICCOMPETITIONComparingMonopoly&Monop.CoprofitATCPAMonopolisticallyCompetitiveFirmEarningProfitsintheShortRunThefirmfacesadownward-sloping

Dcurve.AteachQ,MR<P.Tomaximizeprofit,firmproducesQwhereMR=MC.Thefirmusesthe

DcurvetosetP.QuantityPriceATCDMRMCQ031MONOPOLISTICCOMPETITIONprofitATCPAMonopolisticallyClossesAMonopolisticallyCompetitiveFirm

WithLossesintheShortRunForthisfirm,

P<ATC

attheoutputwhereMR=MC.Thebestthisfirmcandoistominimizeitslosses.QuantityPriceATCQPATCMCDMR032MONOPOLISTICCOMPETITIONlossesAMonopolisticallyCompeMonopolisticCompetitionandMonopolyShortrun:Undermonopolisticcompetition,

firmbehaviorisverysimilartomonopoly.Longrun:Inmonopolisticcompetition,

entryandexitdriveeconomicprofittozero.Ifprofitsintheshortrun:

Newfirmsentermarket,

takingsomedemandawayfromexistingfirms,

pricesandprofitsfall.Iflossesintheshortrun:

Somefirmsexitthemarket,

remainingfirmsenjoyhigherdemandandprices.033MONOPOLISTICCOMPETITIONMonopolisticCompetitionandMAMonopolisticCompetitorintheLongRunEntryandexitoccursuntil

P=ATCandprofit=zero.NoticethatthefirmchargesamarkupofpriceovermarginalcostanddoesnotproduceatminimumATC.QuantityPriceATCDMRQMCMCP=ATCmarkup034MONOPOLISTICCOMPETITIONAMonopolisticCompetitorintWhyMonopolisticCompetitionIs

LessEfficientthanPerfectCompetition1.

ExcesscapacityThemonopolisticcompetitoroperatesonthedownward-slopingpartofitsATCcurve,

produceslessthanthecost-minimizingoutput.Underperfectcompetition,firmsproducethequantitythatminimizesATC.2.

MarkupovermarginalcostUndermonopolisticcompetition,P>MC.Underperfectcompetition,P=MC.035MONOPOLISTICCOMPETITIONWhyMonopolisticCompetitionIMonopolisticCompetitionandWelfareMonopolisticallycompetitivemarketsdonot

haveallthedesirablewelfarepropertiesofperfectlycompetitivemarkets.BecauseP>MC,themarketquantityisbelow

thesociallyefficientquantity.Yet,noteasyforpolicymakerstofixthisproblem:Firmsearnzeroprofits,socannotrequirethem

toreduceprices.036MONOPOLISTICCOMPETITIONMonopolisticCompetitionandWMonopolisticCompetitionandWelfareNumberoffirmsinthemarketmaynotbeoptimal,duetoexternaleffectsfromtheentryofnewfirms:Theproduct-varietyexternality:

surplusconsumersgetfromtheintroduction

ofnewproductsThebusiness-stealingexternality:

lossesincurredbyexistingfirms

whennewfirmsentermarketTheinefficienciesofmonopolisticcompetitionaresubtleandhardtomeasure.Noeasywayforpolicymakerstoimprovethemarketoutcome.037MONOPOLISTICCOMPETITIONMonopolisticCompetitionandW1. Sofar,wehavestudiedthreemarketstructures:perfectcompetition,monopoly,andmonopolisticcompetition.Ineachofthese,wouldyouexpecttoseefirmsspendingmoneytoadvertisetheirproducts?Whyorwhynot?2. Isadvertisinggoodorbadfromsociety’sviewpoint?Trytothinkofatleastone“pro”and“con.”ACTIVELEARNING1

Advertising3838MONOPOLISTICCOMPETITION1. Sofar,wehavestudiedthrAdvertisingInmonopolisticallycompetitiveindustries,productdifferentiationandmarkuppricing

leadnaturallytotheuseofadvertising.Ingeneral,themoredifferentiatedtheproducts,

themoreadvertisingfirmsbuy.Economistsdisagreeaboutthesocialvalueofadvertising.039MONOPOLISTICCOMPETITIONAdvertisingInmonopolisticallyTheCritiqueofAdvertisingCriticsofadvertisingbelieve:Societyiswastingtheresourcesitdevotestoadvertising.Firmsadvertisetomanipulatepeople’stastes.Advertisingimpedescompetition–

itcreatestheperceptionthatproductsare

moredifferentiatedthantheyreallyare,

allowinghighermarkups.040MONOPOLISTICCOMPETITIONTheCritiqueofAdvertisingCriTheDefenseofAdvertisingDefendersofadvertisingbelieve:Itprovidesusefulinformationtobuyers.Informedbuyerscanmoreeasilyfindandexploitpricedifferences.Thus,advertisingpromotescompetitionandreducesmarketpower.Resultsofaprominentstudy:

Eyeglassesweremoreexpensiveinstates

thatprohibitedadvertisingbyeyeglassmakers

thaninstatesthatdidnotrestrictsuchadvertising.041MONOPOLISTICCOMPETITIONTheDefenseofAdvertisingDefeAdvertisingasaSignalofQualityAfirm’swillingnesstospendhugeamounts

onadvertisingmaysignalthequalityofitsproduct

toconsumers,regardlessofthecontentofads.Adsmayconvincebuyerstotryaproductonce,

buttheproductmustbeofhighqualityforpeople

tobecomerepeatbuyers.Themostexpensiveadsarenotworthwhile

unlesstheyleadtorepeatbuyers.Whenconsumersseeexpensiveads,

theythinktheproductmustbegoodifthecompany

iswillingtospendsomuchonadvertising.042MONOPOLISTICCOMPETITIONAdvertisingasaSignalofQuaBrandNamesInmanymarkets,brandnameproductscoexistwithgenericones.Firmswithbrandnamesusuallyspendmoreonadvertising,chargehigherpricesfortheproducts.Aswithadvertising,thereisdisagreementabouttheeconomicsofbrandnames…043MONOPOLISTICCOMPETITIONBrandNamesInmanymarkets,brTheCritiqueofBrandNamesCriticsofbrandnamesbelieve:Brandnamescauseconsumerstoperceivedifferencesthatdonotreallyexist.Consumers’willingnesstopaymoreforbrandnamesisirrational,fosteredbyadvertising.Eliminatinggovtprotectionoftrademarks

would