Monopolistic Competition, Microeconomics, Priceline, Groupon

1. 10 | Monopolistic Competition
SR and LR Equilibrium, Advertising, Consumer surplus in MC
ECO217 Microeconomics I

2. ECO217 Autumn 2013/2014 2 of 9
Monopolistic competition
Monopolistic competition – market organization in which there are many firms selling closely related but not
identical commodities.
Example – different washing powders in market, different watches etc
Sellers have some degree of control over the prices – thus they face negatively sloped demand curve.
Existence of many close substitutes limits the sellers “monopoly”
In monopolistic competition firms face highly elastic demand curve
Important is advertising, location of business, qualification of seller etc. which allows to increase price

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Monopolistic competition
1. Goods are not homogeneous, but can be substituted easy. Market is not fully competitive
2. Producer can enter market easy and leave it easy
3. Producers can not influence other suppliers in market. If seller lowers price, consumers for
his/her good increase and vice versa.
4. Even goods are different their substitutability is high. Price differentiation is possible
5. In some markets monopolies can emerge as goods are different. Example, pharmaceutical
companies improving quality of medicine etc.
6. Important are brand names. Products of famous companies are sold at higher price

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Monopolistic competition
Short-run equilibrium
Profit maximized when MC = MR

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Monopolistic competition
Long-run equilibrium –
if firms make economic profit in SR, new firms
will enter until all profit is squeezed out
Minimum efficient scale – the smallest
quantity which the average cost curve reaches
its minimum

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Advertising in monopolistic competition
Advertising increases AC
Might give temporally advantage over other firms
Advertising can also reduce price if per unit
cost decreases at higher output levels

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Group buying in monopolistic competition

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Normal price is $200, at sale hotel lowers
price to $159 and increases profit if price is
in elastic side of demand curve. Guy in
video thinks it is the lowest possible price of
this hotel.
This hotel sells rest of rooms for
priceline.com for customers who bid at
prices from $159 and below.
Bidders below $50 will not get room, but
between $159 to $50 will be given room if
available. Customers can bid only once a
day!!! This effectively hides MC level from
them.
hotel’s demand curve

9. ECO217 Autumn 2013/2014 9 of 9
Dr. Martins Priede
ECO217 Microeconomics I
martins.priede@xjtlu.edu.cn