ECON 201 1nd Edition Lecture 20 Outline of Current Lecture I Introduction II Determining Market Structure III Monopolistic Competition IV Output price and profit of a monopolistic competitor Current Lecture I II III Introduction a Market structure refers to the physical characteristics of the market within which firms interact the numbers of firms in the market and the barriers to entry b Monopolistic competition there are many firms selling differentiated products There are few barriers to entry c Oligopoly there are a few interdependent firms There are often significant barriers to entry and strategic decision making Determining market structure a Defining a market has problems i What is an industry and what is its geographic market local national or international ii What products are to be included in the definition of an industry b Using cross elasticity c Using North American Industry Classification System NAICS is a classification system of industries adopted by Canada Mexico and the U S in 1997 d Economists use i The concentration ratio 4 CR the value of the sales by the top 4 firms of an industry stated as a percentage of the total industry sales 1 Higher 4 CR closer to monopoly 60 ii The Herfindahl index HI an index of market concentration calculated by adding the squared value of the individual market shares of all firms in the industry HI 1000 merge allowed 1 Problems of using 4 CR and HI conglomerates Monopolistic Competition a The four distinguishing characteristics of monopolistic competition are i Many sellers no collusion independent ii Differentiated products monopolistic power can influence price These notes represent a detailed interpretation of the professor s lecture GradeBuddy is best used as a supplement to your own notes not as a substitute IV iii Multiple dimensions of competition differentiation matters What are dimensions Physical service location image iv Easy entry of new firms in the long run limit long run profit Output price and profit of a monopolistic competitor a A monopolistically competitive firm prices in the same manner as a monopolist where MC MR SR profit is possible b But the monopolistic competitor is not only a monopolist but a competitor as well At equilibrium ATC equals price and economic profits are zero In the long run
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