Managerial Economics & Business Strategy - PowerPoint by G2iv1V

VIEWS: 27 PAGES: 10

									    Managerial Economics &
       Business Strategy
             Chapter 8
Managing in Competitive, Monopolistic,
  and Monopolistically Competitive
              Markets
  Managing a Monopolistically
      Competitive Firm
• Like a monopoly, monopolistically competitive
  firms
      have market power that permits pricing above marginal cost.
      level of sales depends on the price it sets.
• But …
      The presence of other brands in the market makes the demand for
       your brand more elastic than if you were a monopolist.
      Free entry and exit impacts profitability.
• Therefore, monopolistically competitive firms
  have limited market power.
               Marginal Revenue Like a
                     Monopolist
 P
                                                       TR                            Unit elastic
100
                Elastic
                               Unit elastic
 60                                                   1200
                                      Inelastic
 40

 20                                                    800


      0   10    20        30     40      50       Q          0   10        20   30      40       50   Q
                           MR
                                                                 Elastic             Inelastic
          Can we use the theory?
•   Number 9
•   The CEO of a major automaker overheard one of its
    division managers make the following statement
    regarding the firm’s production plans: “In order to
    maximize profits, it is essential that we operate at the
    minimum point of our ATC curve”. If you were the
    CEO of the automaker, would you praise or chastise the
    manager?
•   Chastise the manager. Profit maximization requires
    producing where MR = MC.
        Monopolistic Competition:
          Profit Maximization
• Maximize profits like a monopolist
     Produce output where MR = MC.
     Charge the price on the demand curve that corresponds to that
      quantity.
       Three cases (graphically) with
               Monopolistic
• Profit
     Price > ATC
• Break-even (Zero Economic Profit, Normal Profit)
     Price = ATC
• Loss and continue to operate
     ATC > Price
         Short-Run Monopolistic
              Competition
                                MC
$
                                           ATC
                 Profit




    PM
ATC

                                     D


                QM             Quantity of Brand X
                          MR
          Long Run Adjustments?
• If the industry is truly monopolistically
  competitive, there is free entry.
     In this case other “greedy capitalists” enter, and their new brands
      steal market share.
     This reduces the demand for your product until profits are
      ultimately zero.
         Long-Run Monopolistic
              Competition
          Long Run Equilibrium
          (P = AC, so zero profits)            MC
$
                                                          AC




    P*


    P1

                                      Entry         D

                               MR         D1
                    Q1 Q*                     Quantity of Brand
                               MR1                    X
          Monopolistic Competition
The Good (To Consumers)
      Product Variety
The Bad (To Society)
      P > MC
      Excess capacity
        • Unexploited economies of scale
The Ugly (To Managers)
      P = ATC > minimum of average costs.
        • Zero Profits (in the long run)!

								
To top